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The borrowers were willing but the banks were also pushing the supply by reducing costs and conditions (culminating some said in NINJA mortgages – for those with no income, no job and no assets). So I have no doubt that we have seen some supply changes to credit. Next we need to distinguish the sustainable changes from the cyclical. Sustained changes either in the economy or in financial sector technology may justify some increase in supply. For example, we have seen a long period of low and stable inflation and unemployment and that is expected to continue. That reduces some of the risks to lenders and borrowers and may increase both the demand and supply of credit and the value of assets on a lasting basis. The development of information technology allows banks to collect and analyse more information about borrowers which should allow them to target credit better and justify a change in supply. Finally the development of derivative markets has allowed the risks in loans to be split into their separate components and distributed to the people best placed to bear them. Again that should lower the supply curve for credit. All these factors were at play in the consumer credit and the sub prime markets but, despite the new sophistication of credit scoring and the derivatives markets, they both also showed all the classic signs of a credit cycle. Banks competed for business by lowering the costs and conditions on lending while the economy expanded, defaults were few, and profits appeared high. | Next January we will be 17, with Estonia joining. This highlights the challenge of permanently strengthening and deepening the governance of the euro area, with new economies coming in. Financial Times: Before we talk about governance, let me ask you some specific questions about the crisis management measures. How are you going to reduce the dependence of the likes of Greece, Portugal, Spain, Ireland on extra liquidity provided by the ECB? Jean-Claude Trichet: As you know, the European economy relies very much in terms of financing on commercial banks. So it’s not surprising that our own “non-standard measures” concentrate much more on bank refinancing than on intervening in markets, in comparison with the Fed. As markets gradually stabilise, our non-standard measures, which are fully consistent with our mandate and, by construction, temporary in nature, will continue to be BIS Review 115/2010 1 progressively phased out. So we are accompanying the market as it progressively goes back to normal. But, as I said already, it is a process which takes time. Financial Times: Do you have in mind, though, a need to phase out “non-standard” refinancing and do you have a sort of time horizon for this? Jean-Claude Trichet: We of course have to consider all those measures as transitory. They are there to cope with a situation which is abnormal – to help correct those markets that are dysfunctional and thereby help restore a more normal transmission mechanism for our monetary policy. | 0 |
Second, I worry that taking unusually large policy steps may validate a market narrative that Bank policy is either foot-to-the-floor on the accelerator or foot-to-the-floor with the brake. This narrative was fuelled by the (perhaps necessarily) activist responses to the onset of global financial crisis and pandemic.26 It is not unique to the UK. In my mind, the perceptions underling this narrative may help to explain both markets’ reluctance to price in policy tightening in the middle of last year and the subsequent relatively rapid steepening of the money market yield curve of late as central banks have embraced the need to address inflationary pressures. And such perceptions can shape reality. If such swings in market sentiment and expectations were to weaken central banks’ ability to steer the market rates of most relevance to spending and investment decisions, then the transmission of monetary policy will be at risk. Of course, there may be occasions where aggressive monetary policy actions are necessary. Recent history is littered with them: the global financial crisis and onset of the pandemic are cases in point. I would certainly not wish to rule out changes in Bank Rate of more than the usual 25bp in all circumstances. 13 All speeches are available online at www.bankofengland.co.uk/news/speeches 13 Retaining flexibility is important. And given the inflationary pressures we currently face, I can certainly understand why colleagues on the MPC voted for a 50bp hike last week. | I don’t have the time to survey that literature here today.7 But I will summarise a few points that I think are relevant both to my own remarks, and to the current conjuncture. Much of the analytical discussion has taken place with a framework that casts monetary policy strategy in the form of a control problem.8 Within a system that defines the behaviour of the economy, policymakers seek to minimise the social costs arising from the departure of inflation, employment and economic activity from their efficient levels, using the short-term interest rate (and potentially other monetary policy instruments) as a control variable. This is monetary policy as engineering. That cannot be an adequate or complete characterisation of the challenges the MPC faces. But it can help clarify and codify how to think about some of the important conceptual issues surrounding monetary policy decisions in the face of uncertainty. Characterising monetary policy as a control problem has a long history. It achieved renewed prominence as the academic literature sought to formalise and evaluate inflation targeting strategies, once they were introduced by central banks from the early 1990s.9 Since the UK was in the vanguard of these developments, unsurprisingly the Bank of England – in part, through the efforts of many attendees of today’s conference – contributed richly to that research programme.10 A common starting point was the standard new Keynesian macroeconomic model. | 1 |
2 Abel, Jaison R. and Richard Deitz, Why Are Some Places So Much More Unequal Than Others?, Federal Reserve Bank of New York, Economic Policy Review, forthcoming 2019. 3/3 BIS central bankers' speeches | Memo to the Board of Governors of the Federal Reserve System, December 14, 2000. 5 The first instance was the May 2001 Bluebook. 6 Thomas Laubach and John C. Williams. Measuring the Natural Rate of Interest. Board of Governors of the Federal Reserve System, Finance and Economics Discussion Paper Number 2001-56. November 2001. 7 Thomas Laubach and John C. Williams. "Measuring the Natural Rate of Interest," Review of Economics and Statistics 85, no.4 (November 2003): 1063-70. 8 Thomas Laubach and John C. Williams, "Measuring the Natural Rate of Interest Redux," Business Economics 51, no. 2 (April 2016): pp. 57-67. 9 Kathryn Holston, Thomas Laubach, and John C. Williams, "Measuring the Natural Rate of Interest: International Trends and Determinants," Journal of International Economics 108 (May 2017): S59-S75. 10 These issues are discussed in detail in "Adapting the Laubach and Williams and Holston, Laubach, and Williams Models to the COVID-19 Pandemic," and "Measuring the Natural Rate of Interest After COVID-19," by Kathryn Holston, Thomas Laubach, and John C. Williams. 11 Federal Reserve Bank of New York, Measuring the Natural Rate of Interest. 12 Oxford COVID-19 Government Response Tracker, Blavatnik School of Government, University of Oxford. 13 Note that we no longer produce HLW estimates for the United Kingdom because the model does not provide a good fit for the data. The estimates for the UK were highly imprecise even before the pandemic and the subsequent data has exacerbated this problem. 14 Thomas Laubach and John C. Williams. | 0 |
Then, I would like to provide some insights into the preparations banks and supervisors are making to implement the new framework - both internationally and here in the U.S. I’ll end my remarks with some thoughts on where we are in the Capital Accord revision process. 2. Objectives for revising the Capital Accord As you may know, the Committee’s process to revise the Capital Accord began in the late 1990s. It became clear at that time that the original Accord was becoming outdated. Its broad-brush nature where required capital generally does not differ by degree of risk – has had a tendency to discourage certain types of bank lending. It has also tended to encourage transactions whose sole benefit is regulatory capital relief. Further, banks have been developing new methods for monitoring and managing risk in a manner that the 1988 Accord did not anticipate or address. It is due to the hard work of risk professionals and the ideas advanced through organizations like GARP that banks today have an ever improving tool box for identifying, measuring, and controlling risk. In light of those new tools, it is quite clear that the current Accord provides internationally active banks, for which it was originally intended, with less meaningful measures of the risks they face and of the capital they should hold against them. | The more a bank makes use of its risk rating system, the more confidence supervisors are likely to have in the results of the banks’ assessments of their capital needs. Data requirements and validation Clearly, a system is only as good as the inputs that go into it. Accordingly, banks using the IRB approach will need to be able to measure the key statistical drivers of credit risk. The minimum Basel operational standards provide banks with the flexibility to rely on data based either on internal experience or generated by an external source, as long as the bank can demonstrate the relevance of the external data to its own exposures. Regardless of source, sound data are critical for formulating meaningful internal risk assessments. From a broader risk management perspective, access to high quality data will enable a bank to evaluate the performance of its internal rating and risk estimation systems in a consistent and meaningful manner. The Basel standards outline the data history banks will need to use the IRB approach. The Committee recognizes that banks may not currently have all of the required information on hand. For this reason we have continued to engage market participants in a dialogue on this issue. As implementation of the New Accord approaches, we encourage banks to consider their data needs very seriously and to comprehend fully the techniques they will need to use to derive appropriate estimates of loss based on those data. | 1 |
These include the rise of non-bank financial intermediation, and the deep pockets of opacity and interconnections with the banking system – as we have seen in cases such as Archegos, Evergrande, Greensill and Huarong. In addition, medium-term structural trends such as the ongoing digitalisation of finance and increasing climate-related financial risks are so cross-sectoral and global in nature that they can only be effectively addressed through greater cooperation across sectors and across jurisdictions. 2/3 BIS - Central bankers' speeches My third point is that cooperation can, and should, take different forms. While regulation – most notably the Basel framework – is perhaps the most visible product of global cooperation, there are a number of other, equally important, dimensions. Supervisory principles and guidelines, while often high-level in nature, are a powerful tool to help raise the bar when it comes to the quality and effectiveness of risk management practices and supervision, and to help provide a common global baseline. Supervisory cooperation, including through the sharing of supervisory intelligence and best practices, is a vital channel for authorities to assist and learn from one another. Indeed, merely having a continuous and ongoing channel of communication among authorities is perhaps one of the most important levers available to us. Equally, cooperation should be multi-faceted in scope, and should encompass both microprudential and macroprudential financial stability dimensions. | This is reinforced by a dedicated focus on the vulnerable segments of the society, such as how to plan for retirement, the importance of living within one’s means and behaviours that can lead one into high indebtedness. These programmes are delivered to consumers in the workplace and colleges. Our collaboration with employers has proven to be particularly effective in delivering financial education on responsible financial management. Under this approach, strategic alliances have been forged by the Credit Counselling and Debt Management Agency with more than 200 organisations in Malaysia to deliver financial capability programs at the workplace. Equal emphasis is given to developing the enabling infrastructure to support the effective delivery of financial capability initiatives. In Malaysia, the meaningful access to financial education contents and tools, a rigorous assessment framework and an effective partnership that involves the Government, educators, non-Governmental organisations and the financial industry form the vital components of the enabling ecosystem to support the overall financial education strategies. In many instances, changes in consumer behaviour are needed for the intended benefits to be realised. In Malaysia this is the case in the efforts to promote e-payment as a means of improving economic efficiency, productivity and competitiveness. Central to this agenda has been the implementation of various financial education initiatives to encourage changes in consumer behaviour and to inspire confidence in the use of e-payments. | 0 |
However, independence does not mean isolation, which is why it is important for a dialogue between the central bank and the democratically elected institutions, as well as directly with the public at large, to be maintained. There is a third insight, which is related to the second. For independence to contribute to achieving a desired inflation target, it needs to be accompanied by a limited and clearly http://www.ecb.europa.eu/press/key/date/2017/html/sp170330.en.html[03.04.2017 15:53:14] Central bank independence revisited defined mandate for the central bank. As I will explain in a greater detail when talking about accountability, a clear and limited mandate is necessary for the parliament and the public to be able to monitor and evaluate the performance of the central bank. But, apart from that, a clear and limited mandate also reflects the insight, dating back to Tinbergen[5] , that institutions must not be overburdened with multiple goals without having the appropriate instruments to achieve them. These economic insights contributed to the rationale for providing the ECB with a high level of independence, in view of the primary objective assigned to the ECB of maintaining price stability. This rationale has also been recognised by the CJEU, according to which this independence is not an end in itself but serves to shield the decision-making process of the ECB from short-term political pressures in order to enable it effectively to pursue the aim of price stability. | Moreover, the President of the Council and Members of the Commission may participate, without voting http://www.ecb.europa.eu/press/key/date/2017/html/sp170330.en.html[03.04.2017 15:53:14] Central bank independence revisited rights, in the meetings of the Governing Council (Article 284(1) TFEU) and the President of the Council may submit a motion for deliberation to the Governing Council (Article 284(1) TFEU). With regard to questions from Members of the European Parliament, it is interesting to note that during the 2004-2009 parliamentary term, 62 letters with questions from Members of the European Parliament were received. The number of letters more than doubled during the 2009-2014 term to 128 letters. In the current parliamentary term so far, between 2014 and March 2017, some 383 letters have already been received, of which 317 addressed to the President of the ECB and 66 to the Chair of the Supervisory Board. [22]Decision of the European Central Bank of 4 March 2004 on public access to European Central Bank documents, OJ L 80, 18.3.2004, p.42, as amended. [23]Article 127(6) TFEU prescribes that specific tasks concerning policies relating to the prudential supervision of credit institutions may be conferred on the ECB by the Council by means of regulations adopted in accordance with a special legislative procedure. Article 1 of the SSM Regulation states “this Regulation confers on the ECB specific tasks concerning policies relating to the prudential supervision of credit institutions”. [24]See para. 75 of the judgment in the OMT case. [25]See Article 4(3) of the SSM Regulation. | 1 |
Real estate market indicators show an ongoing recovery in the sector which, albeit uneven in terms of market segments and geographical areas, is also contributing to the buoyancy of household spending and employment. Although investment has decelerated in recent quarters, it remains firm given the favourable situation of financial conditions and final demand. The Banco de España's projections anticipate that the current growth phase of the Spanish economy, dating back to the second half of 2013, will persist over the next few years and that it will continue to be supported by gains in competitiveness, the ongoing favourable financial conditions, and the expected positive performance of international markets. The foundations of the recovery in the Spanish economy are, in fact, the correction of certain macroeconomic and financial imbalances, which had built up previously, most notably the improvement in international competitiveness, the progress made in the financial position of households, firms and financial institutions, without forgetting the improvement in employment, with a significant decline in the unemployment rate in the last four years, although it still remains at very high levels. However, it should be noted that GDP growth in recent years has also received a significant boost from factors of a more temporary nature such as lower oil prices, the fiscal impulse which gave rise to an expansionary budgetary policy stance in 2015 and 2016, and the ECB's expansionary monetary policy. Lower growth of activity can be expected as the effect of some of these factors fades. | The projected growth in expenditure on contributory pensions in 2017 is rather higher (3.1%), as a result of the projected increase in the number of pensions and the substitution effect arising from the new pensions that replace those that are terminated, so that the weight of expenditure on pensions in total consolidated State and Social Security expenditure increases to 40.7% (as against 38.5% in 2016). Also, the reduction in expenditure on unemployment benefits, of 7%, should be noted. This is explained by the fall in unemployment and in the coverage rate of contributory benefits. On the revenue side, the main measures included in the draft budget are those that were approved on 2 December 2016 in Royal Decree-Law 3/2016. Notable among them is the amendment to corporate income tax in order to widen the tax base. As regards VAT, limits are placed on the conditions for granting deferrals, and a new system is set up for immediate supply of information. As for excise duties, the rates on alcoholic drinks and tobacco products are raised. In the case of Social Security system revenues, an increase in the maximum contribution base of 3% was approved in the above-mentioned Royal DecreeLaw. | 1 |
Implications for the exchange rate In principle, the following applies: the more the single currency proves to be a stable and strong currency, the greater will be its advantages for Switzerland, too. With the launch of the euro, the standard deviation of the trade-weighted exchange rate of the Swiss franc vis-à-vis the currencies of the European trading partners has narrowed considerably. The decrease in exchange rate volatility is due to the fact that the euro - as already mentioned - has to some extent replaced weak and extremely volatile currencies. This is a welcome advantage for the Swiss economy, which is closely interconnected with the EU. The volatility of the exchange rate is one thing; the level of the exchange rate is another. Since the beginning of 1999, the Swiss franc has appreciated by more than 9% against the euro. In the BIS Review 60/2002 3 beginning, the development of the Swiss franc exchange rate against the euro was relatively stable. However, in the aftermath of 11 September, investors became increasingly risk-averse. This led to a further strengthening of the Swiss franc, which had already appreciated during the year 2000. The strength of the Swiss currency is a considerable challenge for our export-oriented economy. One has to put things in perspective, though. First, rather than on the nominal exchange rate, the competitiveness of the Swiss economy depends on the real exchange rate, which is corrected for inflation. | The institution's determination to achieve price stability may not be seriously doubted despite some minor initial inconsistencies in communication. Finally, a danger potential for Switzerland derives from the traditional notion that the Swiss franc is a safe haven currency. The events after 11 September have shown that this notion still plays a certain role. Nonetheless, a mere glance at the map of Europe, on the one hand, and at the integration of the Swiss economy in the euro area, on the other hand, should convince any investor that the Swiss franc could hardly remain immune to a major crisis in the euro zone. 3.3. Implications for the interest rate level in Switzerland Both nominal interest rates and real interest rates, which are more important for growth, have been relatively low in Switzerland since the First World War. Averaged over the past twenty years, the interest rate spread on money market rates compared with Germany amounted to between 1 and 1.5 percentage points, while the differential between capital market rates came to approximately 2.5 percentage points. This interest differential represents an inestimable advantage for the Swiss economy. The reasons for this so-called "interest rate island" are manifold. First, a lower real interest rate may simply be seen as a reflection of the Swiss franc which appreciates over time. | 1 |
It also allows firms to leverage existing capabilities and so avoid unnecessary compliance costs. There is no one size fits all approach for banks to demonstrate their resolvability; banks themselves are best placed to understand what they need to implement in order to ensure an orderly resolution process, keeping their preparations under review as they grow and change over time. We expect firms’ boards and senior management to take responsibility for their own resolvability, and to satisfy themselves that, if the worst were to happen, they could be resolved effectively. For resolution credibility means effectively executing what we say we will do. The presence of a credible resolution regime supports our aims, meaning that we can be more confident that if a firm does need to exit, it can do so in a way which minimises contagion and disruption. The RAF strengthens our confidence in these plans, by embedding increased accountability and setting strong expectations of firms and their boards. Firms which are already at, or aspire to reach, a level such that their exit would cause an unacceptable level of disruption should factor our resolvability requirements into their business plans – as with any other regulatory requirement. | The Bank is attuned to the ‘proportionality problem’ – we understand the need to balance the costs of operating in a complex regulatory environment with the benefits of having a diverse and competitive banking sector, as my colleague, Sam Woods, set out in his speech on the PRA’s ‘strong and simple’ approach to regulation.9 Indeed as someone who is both a member of the Prudential Regulation Committee and who has operational responsibilities of my own, I see both sides of this trade-off in action. As the Resolution Authority, our aim is to ensure firms can fail in an orderly way, whatever their size. To deliver that, we seek to ensure our policy requirements are proportionate and appropriate for the UK banking system: proportionate to the impact of failure, and appropriate to the institutions they are applied to. Readiness to execute an orderly resolution is an inherently flexible concept; to be effective it must be capable of adapting to wider circumstances as they evolve. In recognition of this, we undertake public consultations for our policies and have sought to provide more detail on our policy expectations as the resolution regime develops, and review the efficacy of our existing requirements to meet the objectives of the resolution regime, including supporting financial stability and protecting public funds. This allows us to listen to and understand different stakeholders’ experiences and perspectives; particularly important given that resolution is a relatively new part of the regulatory regime. | 1 |
On top of that, the OTC derivative contracts had a daily turnover of $ trillion in 1998, and the notional amounts outstanding at end-June 1998 came to $ trillion. There is no doubt that the growth of foreign exchange and OTC markets, together with advances in information technology, has contributed to cross-border capital flows and enhanced risk management standards. It is, however, legitimate to ask what lies behind these vast numbers. What does it mean for the underlying markets if the financial derivatives trading continues to multiply? Do we understand exactly what these $ trillion worth of derivative positions represent? Do we really understand the nature of the fund flows generated from the financial derivative trading in the OTC markets? The problem is that we do not have the answers to most of these questions. To start with, there is not even an adequate statistical framework to capture capital flow data. The current data on balance of payments, international investment position, or flow of funds accounts have two major short-comings: (a) low frequency of quarterly data; and (b) limited breakdown of data by currency, sector, instrument, etc. The BIS, IMF and OECD are examples of institutions which have made some attempts to collate relevant statistics but they are far from complete or timely. This is not just a statistical issue for the data compilers but a major policy issue for the authorities and other users. The compilation of high-frequency and detailed data is going to be resource-intensive and there is keen competition for statistical resources. | I have mentioned two approaches, that of enhanced counterparty risk management and improved transparency and disclosure, which will hopefully help to address the concerns on excessive leverage and on opaqueness of HLIs. There remains the issue of aggressive trading practices, such as taking extreme measures to manipulate prices and to precipitate herding or panic selling by other market participants. Such practices undermine market stability. I therefore call upon the private sector market participants to review matters and devise a code of conduct to improve the standard of market behaviour and practices. For such a code to be effective, I believe it needs to be market specific and applicable to all market participants in that market. Conclusion Ladies and gentlemen, it has often been said that history, especially financial crisis, tends to repeat itself. In the last ten years alone, we have had the ERM crisis in 1992, the Mexican peso crisis in 1994/95 and the latest Asian crisis in 1997/98. Notwithstanding the disturbingly frequent occurrence of seemingly similar financial crises, I am inclined to believe that even though no two crises are exactly the same, if people do not learn from past mistakes, the market will continue to repeat its punishment. The only difference between the major financial crises in recent years is that the punishment is getting more and more severe, if not violent. I have cited three major challenges to learn from the mistakes in the last financial crises. First, domestic structural reforms. Secondly, monitoring and surveillance of capital flows. | 1 |
Christian Noyer: The role of central bankers in today’s global capital markets Speech by Mr Christian Noyer, Governor of the Bank of France and Chairman of the Board of Directors of the Bank for International Settlements, at the 50th General Assembly and Annual Meeting of the World Federation of Exchanges, Paris, 12 October 2010. * * * In May 2009, the ECB initiated a covered bond purchase programme and, in May 2010, it embarked on rounds of interventions in the public and private debt securities markets, actually the sovereign debt market, with a view to, and I quote, “ensure depth and liquidity in those market segments which are dysfunctional”. In fact, since 2008, the active presence of almost all central banks on a wide range of market segments could suggest that direct market intervention has become the general modus operandi of central banks. This is far from being the case and I would like to focus my talk today on the following two ideas: Central banks require efficient markets to fulfil their mandates. This can lead to massive direct interventions in markets but these interventions must remain exceptional. In order to examine the role of central banks in markets, we should start off by considering their mandate, which not only covers the tasks themselves but the way in which they are performed, i.e. in keeping with the principle of independence that governs them. | Even as regional economic integration increases in Asia and other parts of the world, these economies seem a long way from the point where economic, or political conditions, will make a compelling case for monetary integration. In Europe, of course, the political case for monetary integration to a large extent preceded the economic case. And the architects of the European Union integration worked consciously to induce a level of economic integration in Europe that would induce conditions that more closely met the economist's test for an optimal currency area. For most of the emerging markets today, in contrast, the challenge is to establish the conditions that will enable them to live more comfortably in a world where their exchange rates will adjust more freely in response to changing fundamentals. As these economies become more open to capital flows, they will necessarily find it more difficult to occupy the tenuous middle ground with an exchange rate regime that is neither fully fixed nor flexible, but managed in a way that closely tracks the value of the dollar or carefully constrains fluctuations against the dollar. This does not mean that these countries can be indifferent to exchange rate movements or that the exchange rate is irrelevant to the conduct of monetary policy. For many small open emerging economies, price stability and exchange rate stability are obviously intertwined, and a monetary rule that responds effectively to inflation pressure cannot afford to overlook the signals coming from the foreign exchange market. | 0 |
That made no sense. The only possibility of a speedy pay-out of deposit insurance in order to contain contagion was for the authorities in the host countries to pay it and leave the issue of settlement with Iceland for a later date. And this was what they did. From the beginning, there were legal arguments about the merits of such claims. In spite of that legal uncertainty, the Icelandic Government took part in several good-faith attempts to reach a negotiated solution. However, it proved impossible to get ratification through the Icelandic political process, in two cases involving referenda. In retrospect, it is clear that the main reason for this was the Icelandic people’s unwillingness to shoulder financial liabilities that had not been clearly signed by those mandated to do so on behalf of the nation or BIS central bankers’ speeches 3 proven in a court of law to be sovereign obligations. Instead, these were seen as the debts of reckless private bankers. Now the EFTA court has ruled that it was indeed not a sovereign liability. In any case, the recovery from the estate of Landsbanki will cover 100% of all deposits in foreign branches. Without the priority given to deposits in the Emergency Act of October 2008, the recovery to be paid to these depositors would be much lower. This case provides important lessons about the design of deposit insurance within the EU and the clarity of wording, or lack thereof, in EU directives. | Be that as it may, the direct fiscal costs of capital injections into domestic banks, losses on government guarantees, the blanket guarantee of domestic deposits, and the refinancing of the Central Bank are estimated to have amounted to onethird of year-2010 GDP. The net might turn out to be somewhat lower, however; for instance, there will be some recovery on the collateral of CB lending to failed banks. Gross government debt went from under a third of GDP before the crisis to a peak of one GDP, and net debt rose from around a tenth to two-thirds. As a result, there was no fiscal space to save banks 10 times GDP, and attempting to do so would have bankrupted the country. Indeed, Iceland had to embark on a medium-term fiscal consolidation programme even as output was still contracting, in order to stop government debt from reaching an unsustainable level and to rebuild the external confidence needed for the sovereign to regain market access. The overall fiscal effort (measured by changes in the cyclically adjusted primary balance as a percentage of potential GDP) amounted to 10 percentage points 2010–13, more than that of Ireland during the same period (although Ireland will overtake Iceland if the expected effort for 2014 and 15 is added). | 1 |
Of course, as I noted in a speech earlier this year, we will have to monitor inflation expectations closely to ensure that they do not become unanchored. We also need to keep a close eye on the degree to which unit labor cost increases in EMEs and real exchange rate appreciation abroad are passed through into U.S. import prices and consumer inflation. Although the historic evidence is that pass-through has been limited in the United States, we cannot be complacent about this. Meanwhile, we have to recognize that monetary policy works somewhat differently in a world in which a large share of global GDP is part of a de facto dollar block. In particular, we must take into account the feedback loops this creates – how U.S. monetary policy influences financial conditions elsewhere and, how these changes, in turn, influence activity and prices in the United States. At the same time, other nations should recognize that we cannot and do not seek to make monetary policy for the world. Responsibility for ensuring that financial conditions in other nations are appropriate for their own circumstances appropriately lies with their national authorities, and they have a wide range of fiscal, monetary, exchange rate and other policy tools available for this purpose. I do not see any fundamental conflict between U.S. domestic economic objectives and the interests of the global system as a whole. But the existing system of global currency and monetary arrangements does render effective pursuit of these objectives more difficult. | William C Dudley: US economic policy in a global context Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Foreign Policy Association Corporate Dinner, New York, 7 June 2011. * * * It is a pleasure to have the opportunity to speak here this evening and I would like to thank the Foreign Policy Association for inviting me. The Association has served for decades as a catalyst for developing awareness and understanding of global issues and for providing nonpartisan forums for informed discussion. Your mission is clearly a worthy one – now more than ever. In this discussion I will highlight how the recent financial crisis and its aftermath have accelerated the shift in the relative importance of the so-called developed and emerging market economies. I will then discuss how the global economic system needs to adapt in light of the growing relative importance of the EMEs in the global economy. I will explore the implications of these changes for U.S. economic policy and I will also touch on some of the challenges the EMEs face as they seek to consolidate their gains and sustain their success. I will argue that the developed countries and the EMEs need to adjust in mutually supportive ways. In my view, the current relationship between the EMEs and the United States is not sustainable for either side. | 1 |
The idea behind the fixed exchange rate policy was to ensure that inflation in Sweden would be in line with our most important trading partners’ inflation rates and that the fixed exchange rate would function as a nominal anchor. Instead, price and wage developments repeatedly came on a collision course with the fixed exchange rate and Sweden suffered cost crises. To rectify this situation, the krona was BIS Review 111/2006 1 devalued a total of five times during a period of seven years. However, the trend increase in domestic prices and wages continued to rise, so the fundamental problem was still there in the background. The result was modest economic growth, poor productivity growth and more or less stagnant real wages. This performance was markedly weak both compared with earlier periods and in relation to other countries. During the crisis years at the beginning of the 1990s the situation deteriorated even further. Unemployment increased fourfold in the course of a few years and the central government finances deteriorated dramatically. Long-term interest rates rose and the interest rate differential vis-àvis Germany, for example, occasionally came to several percentage points. The fixed exchange rate lost credibility and had to finally be abandoned in November 1992, following large currency outflows and extreme interest rate hikes in an attempt to defend the krona. The nominal anchor that was to hold down inflation and inflation expectations in the economy had loosened. To pin it down again and bring the Swedish economy onto a better track required drastic measures. | When the gold standard was relinquished in 1931 and the krona started to float, as a crisis measure the Riksbank was given the task of maintaining a constant purchasing power for the krona, that is, establishing a constant price level. It all functioned relatively well to the extent that the economic recession of the 1930s was not as severely felt in Sweden as in other countries and the recovery was unusually strong 1 . Economic developments during the inflation-targeting period How has the period with an inflation target worked? Well, looking back on the developments in the past ten years, it is difficult to come to any other conclusion than that the new stabilisation policy regime has lived up to the expectations. The high inflation economy with recurring cost crises, high interest rates and an unstable economic development is a thing of the past. Inflation has instead been low and stable. GDP growth has on average been higher and also more stable than in the 1970s and 1980s, and real wage growth considerably more favourable. Productivity growth has been surprisingly robust – stronger than in the rest of the EU – and there now seems to be broad consensus that the economy’s potential growth rate has been raised. Growth in employment has not been quite as good, but it is nonetheless worth pointing out that the situation today is far better than it was in the mid1990s. It is also interesting to study inflation expectations. | 1 |
Between May 2000 and March 2001, the BIS sold 220 tonnes on behalf of the SNB. For the first 120 tonnes, the SNB paid the BIS a fixed commission while the performance risk resided with the SNB. For the next 100 tonnes, the BIS agreed to pay the average price of the AM and PM London gold fixing plus a small fixed premium. In April 2001, the Governing Board decided that there was no reason to continue to sell through the BIS. The SNB now had the necessary professionals, know-how, trading resources and contacts to the international gold market to trade directly. Two types of selling operations were subsequently pursued: spot sales in the market and sales programs with price caps. Over the next three and a half years, 730 tonnes were sold directly in the spot market. For these sales, the SNB used 25 counterparties in four different continents. In an effort to receive consistently competitive pricing, the Governing Board allowed the SNB traders to become two-way participants in the market. In other words, traders were allowed to buy gold on an intra-day basis up to two thirds of the daily allocated sales volume. Overall, the sales had to be conducted within a clearly defined corridor which was structured around daily sales volumes of approximately one tonne (Figure 5). Typically, the Bank of England was used for the physical settlement of these operations. Apart from spot operations, 350 tonnes were sold through option programs. | The Basel Committee is therefore working intensively on completing the current reform work by the end of the year 1. 1 However, it is still not clear when the review of the exposures to governments and public bodies will be complete. 3 [5] Critics have expressed fears that the reforms I am talking about now will lead to minimum capital for certain banks increasing radically, which in turn risks resulting in a real economic decline. Here I would like to point out that the Basel Committee’s ongoing reform work does not aim to significantly increase the total global capital requirements. Instead, it concerns ensuring that all banks around the world have adequate resilience to manage financial crises and that risks are covered by capital in a uniform way in all banks and all countries. One result of this exercise is that banks that currently have very low risk weights will probably face higher capital requirements, while banks with very high risk weights may face lower capital requirements. Designing a uniform global regulatory framework is not an easy task, particularly as banking systems differ from country to country, but also because we are living in a changing world. The Basel Committee's work is therefore largely a question of finding compromises that all member countries can support and which will stand the test of time. Naturally, the Basel committee is also evaluating very carefully the effects of the proposals now under negotiation. This applies to the effects on the banks as well as on society. | 0 |
Christian Noyer: Lessons from the European experience with exchange rate and monetary policy co-operation Speech by Mr Christian Noyer, Vice-President of the European Central Bank, at the Third Asia-Europe (ASEM) Finance Ministers' Meeting, held in Kobe on 14 January 2001. * * * Ladies and gentlemen, I am delighted to be given the opportunity to participate in this ASEM meeting today in Kobe. This is the second time that the ECB is taking part in this event of increasing importance for the economic and financial co-operation between Asia and Europe. I will discuss today with you which lessons of relevance to Asia might be drawn from the European experience in exchange rate and monetary policy co-ordination. 1. Institutional background One crucial aspect of the ongoing process of globalisation is that, on average, international trade and financial flows are growing at a faster, sometimes a much faster pace than world GDP. This has posed and will continue to pose unique policy challenges. In particular, individual countries are increasingly susceptible to external developments and shocks. This implies an increased need for international cooperation, both at the global level and at the regional level, in order to mitigate the effects of the potential negative externalities associated with globalisation. In this context, the various processes of regional integration (e.g. EU, NAFTA, MERCOSUR, ASEAN) should be seen as integral parts of broader multilateral co-operation, and not as a weakening of global surveillance. | In fact, the spill-over effects transmitted from one region of the world to another via interest rates, exchange rates and equity prices, for instance, can be mitigated through closer regional integration. By reducing the relative degree of economic and financial openness of the regions concerned, such integration can be an effective instrument to shield them from external shocks, thereby obviating the need for trade or capital restrictions. The European experience shows that regional integration can be beneficial in this respect. The euro area weathered well the economic slowdown and financial market uncertainties arising from the series of balance of payments crises seen between 1997 and 1999. Likewise, provided that the current economic slowdown in the United States does not develop into a hard landing, the euro area is expected to record in 2001 above-potential growth for the second year in a row. To be sure, sheltering domestic economies from external shocks was not the primary consideration of European integration when it was initiated almost 50 years ago. Nor were the creation of the euro and the setting-up of the European Central Bank (ECB) objectives at that time. These are, in fact, only the latest developments in a long process of regional integration that started and is continuing with a strong political commitment. | 1 |
For example, in the June TLTRO III operation, participating banks received a total of € trillion, a record high for the Eurosystem’s refinancing operations. The evidence available suggests that these operations have fulfilled 1 See Aguilar et al. (2020). 3 the purpose for which they were conceived, since banks have indeed used the funding received to lend to the real economy.2 These measures, along with those adopted complementarily both by national governments (in particular through the public loan-guarantee schemes) and by the prudential authorities, aimed at enabling financial institutions to use some of the capital buffers built up in recent years, have been pivotal in facilitating the flow of financing to the economy during the crisis.3 Near and medium-term challenges for the euro area economy and monetary policy Let me now share some thoughts on the current outlook for the euro area and the role that monetary policy could play in the near and medium term. One year on from the first reported cases of COVID-19 in Europe, the coronavirus pandemic continues to exact a tragic human cost and pose enormous challenges for the economy. Since reaching its weakest level last spring, economic activity in the euro area has been on a recovery path. However, this recovery is subject to a high level of uncertainty and has been partial, uneven and fragile. | - In this regard, we must closely monitor long-term nominal interest rates and act accordingly in order to maintain favourable financing conditions, in accordance with our communication in December. - These long-term interest rates developments must also be analysed alongside developments in the rest of the yield curve. In this respect, in tandem with the aforementioned developments, we have observed a steepening of the risk-free yield curve, which may reflect market expectations of an earlier start to the process of reducing the accommodative stance of our monetary policy. Given that medium-term inflation expectations, as I have already said, remain far below levels consistent with our aim, and high uncertainty persist on the evolution of the economy, these developments underline the importance of avoiding premature increases in nominal interest rates that may jeopardise the convergence of inflation towards our mediumterm aim. - We must also continue to focus on heading off cross-country financial fragmentation, which hinders the smooth transmission of monetary policy and the achievement of our inflation aim. In addition to analysing changes in interest rates on sovereign debt, this means that, among other things, we need to pay special attention to developments in bank lending conditions, given the particular importance of the bank-based channel in the euro area for the financing of households, firms and the self-employed. In this regard, 9 sovereign risk premia have so far remained very subdued. | 1 |
The IFSB which was established in 2002 has been instrumental in developing and issuing global prudential standards and guiding principles for the industry. The IFSB has also contributed to the harmonisation in the development of Islamic finance across different jurisdictions. Apart from the implementation of these prudential standards, there is also a need to ensure the supervisory and legal infrastructure remains relevant to the rapidly changing Islamic financial landscape. In Malaysia, these efforts are also supported by a comprehensive financial safety net that includes a deposit insurance scheme and a resolution mechanism, so that not only are depositors protected, but it also allows for prompt, effective and least cost resolution of the financial system that can facilitate recapitalization of Islamic financial institutions as well as institute programme to remove troubled assets from the books of financial institutions. Greater collective effort by international community to strengthen global financial stability In the reform of the international financial architecture, the G20 has launched an ambitious agenda to reform financial regulations, which include key main areas namely, (1) the strengthening of international frameworks for prudential regulation, (2) the review of the scope of regulation, (3) the revision of accounting standards; and (4) more effective oversight of the credit rating agencies as well as strengthening risk management. 1 These areas should 1 2 Declaration on Strengthening the Financial System by Leaders of the G20, London 2 April 2009. | Zeti Akhtar Aziz: Islamic finance and financial stability Opening remarks by Mrs Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the BNM High Level Conference on Financial Stability, Bank Negara Malaysia, Kuala Lumpur, 24 November 2009. * * * It is my great pleasure to welcome you to Bank Negara Malaysia Conference on Financial Stability that is being held in conjunction with 15th IFSB Council Meeting and the 3rd IFSB Public Lecture on Financial Policy and Stability. This conference takes place at a time when there has been intense discussion by the international community on the necessary financial reforms at both the national and international level so that we will avoid such global crisis of such a scale in the future. This conference today provide us with an opportunity to reflect on the new challenges that are emerging from this global financial and economic crisis and discuss Islamic finance and the need to ensure not only its resilience but how it might contribute to global financial stability. Indeed, Islamic finance has a potential role in contributing not only to global financial stability but also towards a more balanced global growth. While Islamic finance by its very nature and its direct link to economic activity contributes to this process, the recognition of the new financial challenges ahead require further steps to be taken to strengthen its resilience and robustness. | 1 |
8 This tendency of financial systems towards boom-bust cycles goes back, for example, to the work by Minsky (1977), “A theory of systemic fragility”, in Altman and Sametz, Financial Crises, Wiley. Notably, observers from the Bank for International Settlements, such as Bill White and Claudio Borio, warned before 2007 that such imbalances were building up. 9 For example, Gorton (1988), “Banking panics and business cycles”, Oxford Economic Papers, 40, observes that most US banking crises during the national banking era could have been predicted with a simple business cycle model. 10 See, for example, Acharya, Pedersen, Philippon and Richardson (2009), “Regulating Systemic Risk”, in Acharya and Richardson (eds. ), Restoring Financial Stability: How to Repair a Failed System, Wiley; Lo (2008), “Hedge Funds, Systemic Risk, and the Financial Crisis of 2007-2008”, Written Testimony prepared for the US House of Representatives, Committee on Oversight and Government Reforms, Hearing on Hedge Funds, November. 11 Basel Committee on Banking Supervision, “Comprehensive response to the global banking crisis”, press release, 7 September 2009. 4 BIS Review 115/2009 system and potentially to a financial crisis. It would have to pay attention to the sources of the three forms of systemic risk discussed earlier – contagion, imbalances and macro shocks. Risk monitoring should identify sources of risks and vulnerability coming from within the financial system – i.e. stemming from financial institutions, markets or market infrastructure – and also those present in the macroeconomic environment and non-financial related events. | Thus, payments enabled by new providers have just started to take off, but it looks promising to become a new normal as they are expected to improve the user experience. How fast this segment of the financial system in the EU is developing can be witnessed by the approximately 300 new providers operating by midSeptember this year, which is just two years since the application of the new regulation-relevant regulatory technical standards under the PSD2 (Open Banking Report, 20212). Most of the companies that offer these innovative services are fintechs, but open banking also 3 1/3 BIS central bankers' speeches offers a possibility for traditional banks. In fact the survey conducted by Accenture3 finds that three quarters (75%) of the banks see payments modernization as being driven by changes in the national payments infrastructure and regulation, which include improving bank-to-bank payments systems, new industry standards and open banking. The rapid move to digital payments has put additional pressure on banks, with three-quarters (75%) of bank executives saying that the pandemic has increased the urgency of their plans to modernize payment systems. Pressures are felt by the central banks as well. In response to changes in consumer payments preferences, the need to further increase efficiency of payments, as well as the disruption caused by COVID-19, the interest in central bank digital currency (CBDC) has also increased. In fact, last year was the launch of the first “live” digital currency in the Bahamas. | 0 |
In total, sterling money market funds saw outflows of around £ or 10% of their total assets, in the eight days between 12th and 20th March last year. At first, the outflows were met by running down their holdings of cash, but as the outflows increased, they sought to liquidate some 2/6 BIS central bankers' speeches of their bank assets – CDs and CP. But they found that the market for those assets – which typically comes primarily from dealers buying back their own paper – was closed. The dash for cash meant that the tide was flowing fast against them. As the regulatory system currently works, if MMFs’ liquid asset ratios fall towards prescribed thresholds, and they are unable to top up their liquid assets (cash) through sales, they are able to ‘gate’ or impose fees on investors, in other words decline to provide immediate liquidity. As with banks, the broader danger of this situation – which is a threat to financial stability – is that such a problem in one fund could trigger contagion to other funds, through fear that they might have the same problem, and thus lead to a highly destabilising run on money market funds. These thresholds can, therefore, also affect the behaviour of fund managers, making liquidity buffers not usable in times of stress, for fear this would fuel investors’ desire to run. | I should note that the remaining vulnerabilities in non-bank finance are perhaps the exception, as on the whole the post-crisis reforms have left a financial system that has stood up well to the acute stress of the Covid period. In order to create a framework for reforms, it is important to set out clearly the principles that should shape the changes. The following principles – while not intended as prescriptive rules – are I think helpful in this respect: 1. As a general principle for all funds – investment and money market – redemption terms should be aligned with the underlying liquidity of assets. 2. Where investors regard funds as cash-like, they should be made resilient so they can operate as such at all times, which means running minimal maturity mismatch risk. 3. Money market funds should not hold less liquid assets on a scale that would make them more suitable to be traditional investment funds. 4. Money market funds should not be designed with regulatory thresholds or cliff-edges which create adverse incentives and amplify first-mover advantage behaviour. 5. Reforms should improve the ability of funds to support short-term funding markets, including by making them more resilient. These principles may sound obvious; indeed, I hope they do. But I would emphasise that they are not obvious in the sense that the current landscape is some way from meeting these principles. I think there are three big picture changes which follow from these principles, and should form the basis of the necessary reforms. | 1 |
Total turnover on the foreign exchange market was 162 billion kronur in 1997, and had doubled since 1996. In addition, the participation of the Central Bank in foreign exchange market transactions fell from 82 percent of turnover in 1996 to 37 percent in 1997. So far this year turnover has continued to increase and the share of the Central Bank has declined to 13.2 percent. Average daily turnover has been about 2 billion kronur this year. Daily fluctuations in the exchange rate increased as a result of last year’s change, but not much when compared to what is common among other countries. Since mid-1993, or for almost 5 years, the exchange rate of the krona has never deviated more than 2.1 percent from the central rate. Yields on Domestic Markets Money market yields declined in the course of the year until the Central Bank raised its rates in November after which they rose. Yields on 3-month Treasury bills rose to 7.22 percent where they stood at year-end. A low Treasury borrowing requirement at times caused a shortage of Treasury bills. Demand for Treasury bills was also boosted because of increased interest in them for liquidity management. Yields on indexed bonds changed little during the first half of 1997 but during the second half the yield on government bonds and housing bonds fell sharply, albeit unevenly. This decline was partly the result of the low Treasury borrowing requirement. The yield on non-indexed government bonds also declined sharply in 1997, although also unevenly, to 8.3 percent at year-end. | Ardian Fullani: The financial future of the region Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the summit of finance ministers and governors “The financial future of the region”, Becici, Montenegro, 14 June 2013. * * * Dear Ministers of Finance, Dear Governors, The crisis we are going through, being so profound and lasting, will leave its mark on economics in general, and central banking in particular. Up until the Great Recession, monetary policy was living in a world that we may call “the inflation targeting era”. To anyone that has followed the discussions regarding the optimal central bank policy ever since the onset of the crisis, it is clear that the validity of the previous approach has been heavily questioned. In many ways inflation targeting made the central bank’s job simple, as long as it followed the policy correctly. The Central Bank, seen by the public as an independent institution, had to credibly commit to an explicit inflation target, in order to anchor mid-term inflation expectations. Self-fulfilling expectations from economic agents and price setters would, in turn, help deliver the objectives of monetary policy. Unfortunately, as shown recently, this strict approach to monetary policy has some shortcomings. What this approach missed, due to its focus in consumer prices, was the drift in prices of assets in general. Escalating asset prices and their sudden burst affected significantly the behaviour and balance sheets of the economic agents and challenged the stability of the financial system. | 0 |
As Mr. Aninat (Former Deputy Managing Director of IMF) said once, and I’ll quote his own words, “Historical experience shows that financial crises are here to stay; and dealing with unfolding crises in real time poses perhaps the most demanding and certainly the most stressful challenge to any central banker”3. As a result, it is widely accepted that financial stability is an important issue for policy makers that they basically cannot ignore. Furthermore, economic literature and experiences of countries also showed that in order to reach sustainable growth and sustainable increase in employment, the key components of the economy are, in addition to indispensable price stability, a sound financial system and a financially stable environment. Dear Guests, For the efficient allocation of resources in an economy, financial intermediation should also function efficiently so that firms can find sources to produce more. As we keep dwelling on the banking sector particularly, banks play a vital role in the economy, matching supply of capital with demand, so knowing how a downturn affects these institutions is important in understanding national economies’ dynamics4. Developments in financial markets have two important implications on the global economy and economic policies: Firstly, stronger a country’s fundamentals are, less vulnerable it is to distortions caused by intensive capital movements. Hence, the importance of macroeconomic stability and strong fundamentals. However, contrary to the general belief, turmoil in global markets in the 90’s also showed that macroeconomic stability in general or price stability in particular does not necessarily guarantee financial stability. | The resulting costs for economies in terms of fall in GDP have reached even double digits and had a significant impact on the welfare of societies, especially in developing countries, and again especially when banking crises coincided with currency crises. In addition to high incidence of “traditional” banking crises, the period also saw certain unusual episodes of financial distress with potentially damaging consequences for the real economy operating essentially through capital markets. This has been most evident in the United States, where non-banking intermediation has developed furthest2. Starting in the late 80’s, examples included the banking crises in Nordic countries, Japan, some Latin countries and East Asia. 1 Caprio G. and Klingebiel, D. (2003). Episodes of Systemic and Borderline Financial Crises. World Bank Database. 2 Borio and White. (February 2004). Whither Monetary and Financial Stability? The Implicaitons of Evolving Policy Regimes. BIS Working Papers. No. 147. BIS Review 38/2005 1 Along with excessive capital flows, economic research in recent years has identified a variety of market imperfections such as moral hazard and asymmetric information that, if widespread and significant, can threaten the smooth functioning of financial systems and lead to panic behavior, bank runs, asset price bubbles, excessive leverage, and inadequate risk management. | 1 |
One angle of this issue is how the membership might impact the overall economy, and hence what challenges as policy makers we could face. The second angle is more specific, as the economic integration is the stepping – stone towards the monetary integration, and the adoption of the Euro as a single currency. Observing the first angle, one should probably try to draw conclusions from the experience of other peer economies that already went, through this process. Entering the EU, for these countries provided confidence anchor and significant reduction of their risk premiums. It enabled strong influx of capital, which underpinned their real and financial convergence. In some of these countries, the finance flows went to productive and tradable segments, making the economies more resilient to shocks and less vulnerable. But, in some of them the allocation of capital was less conducive to sustainable growth, it created excessive imbalances, high leverage and less room for policy makers. The occurrence of the global crisis was a “natural halt” and painful correction of this unsustainable economic matrices. At this juncture, with the global crisis behind us and all the lessons learned, I think as policy makers we are more knowledgeable to reap the benefits of the EU entrance more wisely, and to better deal with the challenges ahead. At this point I must say, that Macedonian economy is already well integrated both in terms of trade and finance with the EU. | It can also reduce the costs of financing, enabling easier access to finance and better opportunities for business decisions. The single currency and the participation in the monetary union provides the country with a backstop in case of financial difficulties and disabled access to international markets through the so-called European Stability Mechanism. Of course, adopting the single currency would mean giving up on the monetary policy independence, which is already limited given the exchange rate peg, and would not require major adjustments. This cost is lesser compared to the benefits that the single market and single currency would bring, under the assumptions that all the policies would be in place and prudent enough to secure sound fundaments and stability of the economy. To recap, the EU integration is a process, which will provide boost and will shape reforms in many areas, underpinning the process of real, social and institutional convergence of the country. It will also impact the monetary policy making, both before and after the final stage of complete monetary integration. The challenges for the central bank are of a multidimensional nature– macroeconomic, institutional, and operational. Steering the wheel properly would require strong institutional capacity and awareness of all the policy makers that smooth integration requires healthy economy, absence of imbalances and sound policies. Thank you. 2/2 BIS central bankers' speeches | 1 |
Let me now turn specifically to financial regulation. To the extent that financial regulation contributes to procyclicality and excessive risk-taking, supervisors could design their regulation in a counter-cyclical fashion to reduce procyclical behaviour of financial institutions. Reflecting this thinking, discussion to date on the role of financial regulation to address procyclicality has focused on four areas. The first is to reduce procyclical tendencies of the Basel II capital regulation by aligning capital requirement more with a longer-term perspective of risk. On this, key measures under discussion include: (1) building capital buffers by capital conservation measures; (2) reducing procyclical effects of minimum capital requirement by adopting through-the-cycle risk parameters to achieve a less pro-cyclical capital ratio; (3) promoting forward-looking provision that can cover loan losses that are not yet incurred but expected, with supporting accounting rule and valuation; and (4) using additional capital charge for the large and more complex banks based on indicators of systemic relevance. The second area of focus is the use of macroprudential supervision. The aim is to use prudential measures, when needed, to restrain the build-up of risk either in the overall financial markets or in specific asset class. Examples here include use of loan-to-value ratio on real estate loans and margin requirements for derivatives and securities transactions. Also, a recent idea of using leverage ratio to help take account of the unknown risk beyond those identified by the risk-adjusted capital regulation also falls into this category. | It is only when confidence improves, typically following a major policy intervention, that the downturn both in the business and financial cycles begin to stabilize. With reference to the current crisis, there were at least two specific features of the financial structures in the advanced economies that amplified the procyclical tendencies in the three cycles I have just described, thereby making the situations worse than might have been. First, the duration of the upswing in the financial cycle was made longer by changes in the financial structures that resulted from financial innovation, misplaced incentives, and the way businesses had expanded by circumventing financial regulation which allowed risk to be underrecognized for a long period. A case in point is the originate-to-distribute model, the CDO derivatives, and the use of SIVs as a vehicle for taking risk out of banks’ balance sheets. Second, in this crisis the downturn of the cycles were particularly damaging partly because of the interactions or feedbacks within the financial system, as opposed to the interactions between the financial system and the real economy. These within-the-system interactions took the form of positive feedback loops in various market segments that were set in motion in the downturn as market participants responded to the emerging problems and distress. Such feedback loops included the SIV shutdown and its compounding effects on CDO losses, the asset fire sales driven by risk management response by banks, and heightened concern about counterparty risk that precipitated the hoarding of liquidity. | 1 |
Legal framework has been established to facilitate the activities of non-banking financial institutions. Last but not least, restrictions on nonresidents’ access to domestic financial markets have been reduced or removed. However, the factor of the greatest significance from the point of view of globalization of financial markets was the liberalization of capital flows. First and foremost, it consisted in the removal of restrictions that impaired free capital flow among countries, including in particular: 2 • removal of restrictions related to FDI and trade in goods and services with non-residents, • transition of the developed countries to the floating exchange rate regimes, establishing of the euro area, and other supranational integration initiatives, • reduction of tax on cross-border transactions (Chart 8). In some countries, liberalization of capital flows and financial markets ensued from the implementation of stability programmes recommended by the World Bank and the International Monetary Fund. As a consequence, a group of countries named emerging markets have appeared on the world economic map. These countries play a vital role both in the global financial system and in the global economy. Chart 8 Customs tariff rates in the developing countries, applicable to Most-FavouredNations (MFN) 25 % 22.2 20 15 19.7 17.9 14.1 11.4 9.9 10 11 5 0 1980-1983 1984-1987 1988-1990 1991-1993 1994-1996 1997-1999 2000-2001 Source: UNCTAD. 2 Ariyoshi A. “Country Experiences with the Use and Liberalisation of Capital Controls”, International Monetary Fund 1999, p. 7. | BIS Review 60/2006 3 Chart 4 : Cross-border investments in shares, 1989-2002 USD trillion 30 25.9 25 21.3 20 16.8 13.5 15 10.5 10 0 11.9 11.2 9.7 8.0 5.1 5 18.7 15.0 2.4 2.1 5.7 10.9 3.0 1.5 0.6 1.4 1.0 2.1 1989 1992 1995 4.8 5.5 7.1 1997 1998 1999 2000 9.4 2001 7.5 2002 Purchase of domestic security by a foreign investor (CAGR - 16%) Purchase of foreign security on investors' local exchange (CAGR - 22%) CAGR ― Compounded Average Growth Rate. Source: McKinsey Global Institute. | 1 |
Either the fixed exchange rate would hold firm and then investors in Swedish kronor would break even, or else the central bank would devaluate. An investor who, for instance, borrowed Swedish kronor and used them to buy dollars, would then, following a devaluation, have a debt in devaluated kronor and assets in dollars. The actual speculation is aimed at causing a devaluation that will lead to this type of profit. However, what encourages speculators to act in this way is an economy that is out of balance, e.g. with a large central government debt, poor public finances or poor competitiveness as a result of high costs. There is a long list of examples, where speculation has made it impossible to retain a fixed exchange rate. As I said, Sweden was forced to abandon its defence of the krona in 1992; the ERM co-operation within the EU with a narrow band for fluctuation broke down in August 1993; Mexico was affected in 1994-95, South East Asia in 1997, Russia in 1998, Brazil in 1999, Turkey in 2001 and Argentina this year. All of these crises have at least one thing in common: the countries concerned had a fixed exchange rate. There are both technical and economic reasons for the large deregulation that occurred in Sweden and other countries. For instance, the advent of the new technology -- IT, electronic money and new financial instruments -- made it more difficult to retain currency regulations and capital market regulations. The "leaks" became increasingly large. | This was the mechanism that made it impossible for us to keep the fixed exchange rate regime in 1992. At the time of the deregulation, Sweden had a history of high inflation and other imbalances. Doubts BIS Review 9/2002 1 regarding the stability of the Swedish economy led to capital outflows, rising interest rates and a shrinking foreign currency reserve. Despite massive supporting purchases of the Swedish krona and a drastic defence involving a 500 per cent daily lending rate for banks borrowing from the Riksbank, the defence of the exchange rate failed. This meant that the general public had to live for a period with a 25 per cent interest rate for long-term mortgages! Lottery with a good chance of winning Financial capital is very transient, if not "restless". It is difficult to obtain good statistics on capital flows, but I have managed to find the following observations. Cross-border trade in shares and bonds in the USA more than doubled as a percentage of the US GDP between 1970 and 1993. During the same period, the corresponding volume rose from almost zero to 10 times GDP in the UK. A fixed exchange rate offers speculation at no risk, if there are signs that the currency is over-valued. This was the situation in Sweden in the early 1990s. The fixed exchange rate regimes signalled to speculators that the exchange rate could only weaken. | 1 |
It must be noted that this occurs in the context of high inventory buildup towards the end of 2018 and the increased uncertainty surrounding the external scenario. In any case, the other part of investment—construction and other works—has remained dynamic and forward going forward signs are still positive. On one hand, related stock market data point to a favorable development. On the other, the large-scale investment projects that are currently in progress—especially in mining—do not register delays and have been unfolding according to plan. Along the same lines, the various surveys of investment projects have not seen any downward and continue to foresee larger amounts for 2019-2020, compared with the amounts invested in the period 2017-2018 (Figure 8). Turning to concessions, the authorities have announced a significant increase in them as from 2020, in particular in hospitals, roads and airports. Add to this the announced approval of a set of complementary works that will be executed in 2019 and 2020. The information of the Association of Engineering Consulting Firms (AIC) for the first quarter of 2019 shows that detail engineering—which covers projects scheduled for one or two years ahead—shows high annual growth rates. In terms of housing investment, although it began the year with a zero contribution to construction GDP, sales remain high and the outlook reflected in the May Business Perceptions Report is positive. In any case, the Monthly Entrepreneurs Confidence Index (IMCE) for the construction sector posted a decline most recently but is still higher tan its all-time average. | International experience shows that countries’ export growth is driven mainly by new firms – in existing product categories and to existing destinations – with a stronger capacity for growth than existing exporters. 7 As some authors have pointed out, taking advantage of this growth potential requires fostering factor mobility across firms of different productivity levels. This process generates a major portion of the gains from economic openness, such that policies that hinder workers crossing over to other firms or that raise the cost of adjusting the scale of production weaken capacity for innovation. 8 Finally, and in the same token, it is clear that the opportunities that China’s strong growth generates for the region must be well used. For this to take place, not only will greater saving be required, but also more productive investment. In other words, one significant challenge facing the economies of the region – and Chile in particular – is to take advantage of this momentary boom in the terms of trade by promoting saving and investment, thus making sure that it does not simply translate into an unsustainable spending spree. To that end, fiscal policy plays a key role by setting up well evaluated investment programs, while maintaining the incentives that promote the accumulation of scarce physical and human capital among private agents. Policies that distort these incentives inevitable end up lowering the rate of saving and investment. | 0 |
Although there are no simple answers, it is in our collective interest to reduce the dependence of so many households and businesses on so few institutions that engage in so many risky activities. The case for a serious review of how the banking industry is structured and regulated is strong. By international standards UK banking is highly concentrated. There are four large UK banking groups. Of these four, two are largely in state ownership and their assets are a multiple of the assets of the next largest bank. As in the English Premier League, getting into the top four will not be easy for those outside it. But in both cases I hope greater competition will produce less rigidity in the composition of the top four. Whichever approach to the “too important to fail” problem is adopted, there is growing agreement that such financial institutions should, as I argued at the Mansion House in June, be made to plan for their own orderly wind down – to write their own will. I welcome that, but without separation of the utility from other components of banking it will be necessary to develop detailed resolution procedures for a very wide class of financial institutions. The options may turn out to be separation of activities, on the one hand, or ever increasingly detailed regulatory oversight, with the costs that that entails for innovation in, and the efficiency of, the financial system, on the other. | 14/17 Regarding the Spanish economy, the latest forecasts of the Banco de España, published some days ago, indicate that, although GDP is expected to decelerate somewhat, it will continue growing above potential and the output gap will hence become progressively more positive. This is therefore the time to reduce some of the structural vulnerabilities of our economy, derived partly from high external and public sector debt, which limit the room for manoeuvre of fiscal policy and increase vulnerability to rising interest rates or risk premia. The financial cycle of the Spanish economy also seems to be gathering impetus, although according to our forecasts, some time will pass before it reaches the warning levels. Total credit to the non-financial private sector has begun to increase, albeit very slightly, and it continues to decrease as a proportion of GDP, albeit at a progressively slower pace. Only some specific portfolios, such as consumer lending, show high credit growth, so banks must tighten their credit standards in order to reduce the significant rise in NPLs being observed. 15/17 However, the largest credit portfolio continues to be mortgage loans. Therefore analysis of the real estate sector is crucial for financial stability. As I have noted on other occasions, this market is reawakening, with an increase in transactions and rising house prices which, even so, are still on our estimates at levels compatible with their fundamentals. | 0 |
Spanish deposit institutions have been operating reasonably comfortably above the minimum capital ratio, although the sharp growth of activity has reduced the solvency ratio to below what has historically been the case in our banking system. This comfort margin provides some room for manoeuvre in the face of potential shocks, especially when regard is had to the quality of such capital and its regular generation. Growth in activity such as that hitherto described, against such a favourable macroeconomic and financial-market background, should not lead bank managers to feel complacent. On the contrary, the difficulties of sustaining the growth rate of activity, the foreseeable normalisation of favourable monetary and financial conditions and the recent increase in volatility on international financial markets against a backdrop of historically low risk premia requires watchfulness and reflectiveness concerning the business strategy in different environments. The analysis of adverse scenarios is a vital tool in situations of rapid and far-reaching change, so that responsiveness to combinations of adverse shocks may be determined; though such shocks are not the foreseeable central scenario, they should be part of any financial institution’s risk analysis. From the regulatory standpoint, 2005 was also an intense year. Throughout 2005 credit institutions successfully applied the new accounting Circular, working on their adaptation to the New Capital Accord. These implementation efforts were not confined to 2005, but must continue over the coming years, with a follow-up on the most novel aspects of the new accounting rules, especially in respect of capital, transparency and management accountability. | The current account deficit can now be financed through foreign direct investments (FDI) and long-term capital inflows. The FDI inflows were in excess of USD 20 billion in each of the last two years, putting Turkey among the top 5 developing countries in FDI inflows. Fourth, Turkey is one of the few countries with a “convergence story”. Negotiations with the European Union over the full membership status provide a major stimulus to policy makers to put Turkey’s huge potential into life and complete the reform agenda. This agenda consists of next generation policies and reforms that focus on removing structural bottlenecks and improving the economy’s capacity for labor absorption, innovation, and competitiveness. Dear Guests, Turkey has had a heavy structural reform agenda since 2001. However, continuation of structural reforms is of vital importance for the sustainability of economic gains achieved in recent years and for the resilience of the economy to further shocks in the future. The most important structural reform in the pipeline is the social security reform that is expected to significantly improve Turkey’s fiscal balances in the medium and long term. It is also expected to contribute to our domestic savings rate. | 0 |
The lags between a change in interest rates and its effects on output, demand and, ultimately, inflation mean that rough weather and occasional storms in the world economy are likely to blow us off course, at least for a time. A true test of the MPC is not whether it hits the target when the sea is calm, but how it reacts to the storms, or economic shocks, that will inevitably arise. The most immediate challenge for the MPC is that, although inflation may fall below the target over the next year, before long the inflation prospect further ahead will depend more on domestic inflationary pressures than it has over the past year or so, when external factors made a major contribution in holding down retail price inflation. Lags mean that the MPC needs to look ahead. The test of the MPC will be how it responds to the inflation prospect. Even in the absence of unexpected shocks there are major uncertainties. Trying to understand changes in the way the economy behaves is a crucial part of the MPC’s work. In recent years we have seen a combination of lower inflation, lower earnings growth and faster output growth than previous relationships would have led us to expect. The reasons for this benign combination of growth with low inflation are not easy to diagnose. Some have talked about a new era or a “new paradigm”, in which productivity growth has permanently risen. We should be cautious about those who speak of new paradigms. | As has happened under different circumstances, any movements of the exchange rate away from the trend assumed as a working assumption is possible in a floating regime, and its potential effects on the financial system, output or employment will be considered by the Board as inputs for their future decisions. Summarizing, for the rest of this year, annual CPI inflation is expected to return to figures around 3% to then move to the upper limit of the tolerance range for some months. This short-term trajectory is influenced by one-time effects, which will eventually revert, permitting inflation to hover around 3% throughout 2011 and to the end of the relevant projection horizon, this time the third quarter of 2012. Y-o-y CPIX1 inflation will describe a more gradual convergence to 3%, largely because the shorter-term effects on inflation are concentrated in items outside the CPIX1. Private expectations are not very different from this (figure 10). The Board estimates that it will continue withdrawing the monetary stimulus at a pace that will depend on how domestic and external macroeconomic conditions unfold. This process of MPR normalization was begun in June and continued in the meetings of July and August – with increases of 50 basis points each time – taking the MPR to 2% y-o-y. Going forward, the market has internalized a process of withdrawal of the monetary stimulus in the coming quarters. This is consistent with the progressive normalization of credit conditions, which is visible in various markets and indicators. | 0 |
Secondly, Estonia has avoided volatile short-term capital flows due to strong fiscal stance. While these "soft" policy principles support crisis prevention by providing relatively stable and transparent environment, the resilience of the system depends ultimately on the actions of market participants themselves. The task of the authorities is to provide an adequate regulatory framework and to undertake maximum effort for the supervision of the implementation of these regulations. There is another interesting, albeit still debated issue – to what extent should the supervisors rely on banks' internal risk control models and ratings. Estonian banking supervisors have taken relatively forward-looking approach in that respect by increasingly relying on risk-based approach of supervision. At the same time, and having in mind rapidly developing economy and currency board arrangement, we believe that our banking system should have also robust liquidity buffers as well as sufficient capital to withstand the fluctuation of asset prices. Therefore, we have set relatively high reserve requirement half of what the banks can meet by the holdings of high-rated foreign assets. We will further adjust the system of reserve requirements in the future as monetary policy framework will converge towards the eurosystem principles. Finally, I would like to stress that as an essential element of the safety net, the Deposit Insurance Fund is functioning well and has proved its usefulness already two years ago. The immediate task for Estonian authorities is to introduce the investor protection scheme for the other parts of the financial system. | This is especially valid with respect to the area of macro-prudential tools and instruments, in view of the significant differences across countries in their initial conditions or stages of development and convergence. Starting with the obvious focus of interest for every central bank – namely monetary policy – I would like to remind you that the BNB is among the few central banks in the world with such recent know-how in two remarkably contrasting monetary policy regimes. Since the start of transition from the centrally planned economy 25 years ago and the restoration of the traditional two-tier banking system in Bulgaria, we initially practiced discretionary monetary policy, and then after our crisis, we introduced the currency board arrangements in 1997. In addition to conducting monetary policy aimed at maintaining price stability, the BNB was traditionally entrusted with the regulation and supervision of the Bulgarian banking system. The banking regulations in Bulgaria and the supervisory powers of the BNB were strengthened after our crisis in the mid-1990s. The BNB has ever since persisted in implementing highly conservative supervisory standards. As a result, today the banking system of Bulgaria remains one of those in the EU where no single bank needed to be rescued or supported with taxpayers’ or central bank money. Furthermore, our banking system is already in full compliance with the new Capital Requirements Directive and the Capital Requirements Regulation. | 0 |
Given its source – the third in a triplet of crises, this time afflicting the emerging market economies – I do not expect that rise in uncertainty to be temporary. I expect its impact to be greater in today’s world of post-crisis traumatic stress and could more than offset the cost of capital accelerator, as we have already seen repeatedly since the crisis. Against that backdrop, my view is that the case for raising interest rates is still some way from being made. Whatever the reason, the economic aircraft appears to be losing speed on the runway. That is an awkward, indeed risky, time to be contemplating take-off. Meanwhile, inflationary trends do not at present given me sufficient confidence that inflation will be back at target, even two years hence. Growth has slowed towards trend in the UK, US and globally. And speed limits matter. Any further loss of momentum would risk taking growth below trend, widening the output gap and adding to downward pressures on already-weak prices. My personal view is that, in the current environment, a rate rise would increase unnecessarily the chances of the economy falling below critical velocity, thereby extending the period inflation remains below target. For those reasons, I have continued to vote to leave rates unchanged, with a neutral stance on the future direction of monetary policy. Now more than ever in the UK, policy needs to be poised to move off either foot depending on which way the data break. General Secretary. | Chart: Projections for the key policy rate in various Monetary Policy Reports In the period to the monetary policy meeting in March 2015, the Norwegian economy had moved broadly in line with the path projected in December 2014. Inflation remained close to 2.5 percent. Unemployment had remained stable and was slightly lower than expected. At the same time, the outlook ahead was weaker than envisaged in December. Oil prices had continued to slide and activity in the petroleum industry appeared to be falling more than previously anticipated both this year and next. Wage growth in 2014 turned out to be lower than assumed and there were prospects of somewhat lower wage growth ahead than projected earlier. At the monetary policy meeting in March, Norges Bank gave weight to that fact that the key policy rate had been reduced in December to counter the risk of a pronounced downturn in the Norwegian economy as a result of lower oil prices. So far, the effects on the real economy had been relatively small. At the same time, house prices had continued to rise at a rapid pace. The rapid rise in property prices may lead to higher debt growth. That may increase household vulnerability and trigger or amplify a downturn in the economy further ahead. Based on an overall assessment, Norges Bank chose to leave the key policy rate unchanged. | 0 |
They are particularly useful because they are able to summarise a vast amount of information and analyses within a coherent and internally consistent accounting and economic framework. However, unlike in the case of inflation targeting strategies, they do not constitute the main vehicle around which the policy process and communication are organised. The Governing Council of the ECB bases its policy judgment on these and many other inputs, which include inter alia competing forecasts from other private and public organisations as well as other pieces of information that, for a number of reasons, are difficult to integrate within the framework of the projections. By way of example, information (i.e. data, indicators, analyses, etc.) that becomes available after the cut-off date for the projections cannot, by definition, be incorporated in the exercise. At a more fundamental level, we should acknowledge that even the state-of-the-art macroeconometric models of the kind used nowadays by leading central banks are, as yet, unable to fully incorporate a richer description of the economy’s financial structure. Wealth effects, swings in asset prices, credit and liquidity constraints and other financial frictions are not sufficiently taken into account. That results in an over-simplified view about the channels through which monetary policy can affect economic activity and inflation. It also affects the ability of such models to identify, and hence estimate with any degree of precision, the potentially significant role of financial variables and financial intermediation in the monetary transmission process. | Protectionism Is Not the Answer Given these costs of global integration and more liberalized trade, what is the best path forward? Although protectionism can have a siren-like appeal because of its potential to provide short-term benefits to particular segments of the economy, in the longer term it would almost certainly be destructive. Countries need to compete better, not compete less. Trade barriers are a very expensive way to preserve jobs in less competitive or declining industries. They blunt opportunities in export industries and they reduce the affordability of goods and services to households. Indeed, such measures often backfire, resulting in harm to workers and diminished growth. A better course is to learn from our experience. From a U.S. standpoint, we should work to reduce remaining foreign trade restrictions that impair our ability to capitalize on our comparative advantages. For example, market access restrictions can mean that certain U.S. industries cannot realize their full potential. Similarly, weaknesses in the protection of intellectual property rights limit the ability of U.S. producers to realize the full returns from their investments. This lowers profits and diminishes incentives to grow the business and employ more workers. If we are going to enhance the benefits of free trade and better manage its costs, it is critical that we continue to strengthen the global rules-based system. On the positive side, I would point to the World Trade Organization’s Trade Facilitation Agreement, which addresses customs procedures and could reduce global trade costs significantly. | 0 |
The various packages of monetary accommodation implemented by the Governing Council since mid-2014 have already had considerable success in supporting nominal growth. Even though headline inflation is currently negative, it would have been significantly weaker (around 80 basis points in 2016 according to the Euro-system’s estimates) without these interventions. Real economic growth is slightly stronger and unemployment lower. However, it is important to stress that monetary policy is a companion to structural reforms rather than a substitute. Stimulatory monetary policy cannot be an excuse to postpone structural reforms. Indeed it sometimes feels as if central banks had sole responsibility for supporting growth in the short-run. This is not a comfortable position for us and should not be an acceptable position for any of you. Our monetary policy accommodation has made the cost of investment considerably cheaper but its effectiveness is blunted somewhat if entrepreneurs feel constrained by structural impediments and a lack of economic reform. The OECD has 11 S.Gilchrist and B.Mojon, Forthcomning “Credit Risk in the Euro Area.” The Economic Journal. 12 V. V. Acharya and S.Sascha, 2015. “The ‘Greatest’ Carry Trade Ever? Understanding Eurozone Bank Risks.” Journal of Financial Economics, 115 (2): 215–236. 13 C. Teulings and R.Baldwin, 2014. “Secular Stagnation: Facts, Causes, and Cures” VoxEU.org eBook, CEPR Press. 14 M. Cacciatore, R. Duval, G. Fiori and F. Ghironi, 2016. “Market Reforms in the Time of Imbalance,” NBER Working Papers 22128, National Bureau of Economic Research, Inc.; in ‘t Veld, Jan. 2013. | To counteract this impairment of the credit channel, the Governing Council has, alongside other non-conventional measures which don’t need repeating, also launched two targeted lending programmes. These so-called TLTROs I and II allow banks to borrow up to a fixed fraction of their loan portfolio at an interest rate linked to the ECB official rates. Banks that make new loans in excess of their benchmarks receive a lower average cost of funding. This provides a powerful incentive to expand lending and goes some way towards alleviating funding risks when nominal interest rates are negative. In a further step to alleviate the credit channel, the Governing Council decided to include corporate bonds in its asset purchase programme in March 2016. This should directly reduce the cost of corporate borrowing in capital markets. Overall, these measures have been quite effective in easing credit conditions in the Euroarea. The volume of bank lending to non-financial corporations has begun to grow again and bank lending rates have fallen across the Euro-area but most noticeably in those countries where that had tightened the most. 2. Monetary policy can foster long-term growth by supporting structural reforms The financial crisis in some ways revealed some structural weaknesses in many economies. In some cases there were excessive levels of public debt. 10 In others it were structural 6 R. Riley, C. Rosazza-Bondibene and G. Young, 2015. “The UK productivity puzzle 2008–13: evidence from British businesses,” Bank of England working papers 531, Bank of England. | 1 |
The monetary policy “normalization” period was proved to be short-lived as major central banks decided to delay or reverse their normalization paths in response to the global slowdown resulting from trade conflicts. Excess liquidity created in this low-for-long environment has led to at least two areas of vulnerabilities. Overleveraging of businesses The first area of vulnerability is the overleveraging of businesses. According to the recent IMF’s Global Financial Stability Report, corporate debt has spurred in recent years. In the event of a global economic downturn that is half as severe as the one spurred by the Global Financial Crisis, the IMF estimated that almost 40 percent of corporate debt—approximately 19 trillion USD—could be at risk of defaulting, exceeding the levels seen during the last crisis. In Thailand, we could observe high leverage in many business segments. Some firms even take on debts to buy back their equities from shareholders, thereby reducing their equity base. Moreover, some large corporations have increasingly engaged in new investment outside their core businesses, making risk assessments challenging. 8 In this rapidly changing world, the path ahead is filled with risks and uncertainties that may affect businesses’ revenue and cash flows. Businesses need to ensure appropriate capital structure. Having too much debt will heighten financial vulnerability and could amplify the effects of adverse shocks. Importantly, while debt is necessary for investment and financing through debt is especially enticing in this low interest rate environment, an appropriate level of equity must be preserved to ensure sufficient cushion for adverse events. | Aging population will introduce a dramatic change to the consumer market. But this is also an opportunity: the domestic market for the seniors will become larger. In 2017, consumption of Thai population older than 50 is worth 2.8 trillion baht or around 18 percent of the GDP. This will only continue to grow, creating a large niche market for businesses. Realizing this will open doors for many opportunities ahead. The demand for products focused on senior lifestyles such as orthopedic shoes and anti-slip floorings will grow. Huge opportunities also lie in health-conscious products such as organic produce, food supplements, and low-sodium diets, where Thailand’s welldeveloped food industry could give us a solid foundation. Being one of the first countries to become an aging society will also give us a head start to develop new businesses that would help address the needs of the elderlies, and expand to other markets abroad that will soon become aging societies as well. According to the UN, ten percent of the world population will be older than 65 five years from now, with more than 200 million living in China. Medical tourism industry, for example, need to take advantage of Thailand’s established foundation and scale up to serve the needs of broader spectrum of senior travelers from all over the globe. In addition to demographic change in the Thai market, we should also look at demographic changes at the global level. Outside of Thailand, demographic changes mean more than just an aging society. | 1 |
The objective of price stability, therefore, must be symmetric. The reaction function of central banks should equally be perceived as symmetric. They should be equally vigilant about any deviation from this objective, in either direction, up or down. A central bank that remained passive with persistently low inflation would in effect encourage a downward drift in expectations. The case for symmetry is even stronger today as we are confronted with several sources of uncertainty, regarding: the economic situation; the transmission mechanism of monetary policy; and the underlying causes for low inflation. We should avoid adding a further uncertainty concerning the true priorities of central banks. For the same reason, it would be unwise to entertain the idea that the inflation objective should be revised, – upward or downward. The analytical argument for a higher target sounds attractive. For a given equilibrium real rate, a higher inflation objective would reduce the probability of hitting the zero lower bound in the future. This may be a case, however, where analytics do not provide a proper guide for policy. The truth is we do not know how inflation expectations would react to a change in objective. We are in a period where expectation dynamics are highly uncertain. Empirical evidence collected over the last 15 years shows that, in the euro-area at least, a rate of inflation significantly over 2% triggers very negative reactions from the general public. Finally, the credibility of central banks in sticking to their objective could be jeopardized by the change of definition of price stability. | We remain flexible and ready to make adjustments to our operations as needed to ensure that monetary policy is effectively implemented and transmitted to financial markets and the broader economy. Conclusion I’ll conclude with this: The coronavirus poses evolving risks to the U.S. economy. Our policy action this week positions us well to support the economic expansion. We are carefully monitoring the effects of the coronavirus on the U.S. economic outlook and will respond as appropriate. Our focus remains trained on serving the American people by pursuing our dual goals of maximum employment and price stability. Once again, thank you for this evening’s award. 1 1 Board of Governors of the Federal Reserve System, Federal Reserve Issues FOMC Statement, March 3, 2020. 2 2 Board of Governors of the Federal Reserve System, Statement Regarding Monetary Policy Implementation, October 11, 2019; Federal Reserve Bank of New York, Statement Regarding Treasury Bill Purchases and Repurchase Operations, October 11, 2019. 2/2 BIS central bankers' speeches | 0 |
This calls for a revision of this view.2 In my remarks today, I would like to start by discussing some general issues regarding the linkages between price and financial stability and the linkages between monetary and macroprudential policy. In the second part of this talk, I will refer to the context of international capital flows and policy responses in a small open economy with inflation targeting, and the relation that monetary policy has to have with macroprudential policies in that context. Interactions between Monetary and Financial Policies Most central banks care not only about price stability, but also about financial stability. The goal for price stability is usually the main mandate of central banks, and is widely understood as maintaining low and stable inflation, which also reduces the deviations of output from its potential. However, the central bank’s mandate for preserving financial stability is less explicitly defined; probably in part because there is less agreement on what is financial stability and what should be considered an indicator of it. Broadly understood, it encompasses a stable and fundamental-driven credit and asset price growth, as well as the absence of large mismatches in the financial sector. It is not the purpose of my talk to narrow the definition of financial stability, so I will use the term in a broad sense. There is also the key distinction between micro and macro financial stability, and in most of what follows I will be focusing on the systemic aspects of financial stability, unless noticed otherwise. | The international standards require supervisors to appropriately supervise, monitor and regulate financial institutions for compliance with AML/CFT requirements commensurate with their risks. As such, to effectively implement the above, a country’s AML/CFT supervision has to be embedded in the broader framework of prudential and business conduct supervision. This is to leverage on and optimise the synergies, expertise and resources to ensure effectiveness of both overall supervision of financial institutions and specific AML/CFT supervision. Supervisors are required to ensure effective management of ML/TF risk and compliance with AML/CFT requirements by the financial institutions by assessing institution’s policies, procedures and processes for identifying and managing ML/TF risk and in complying with regulatory requirements. This integration also ensure that supervisors are coherent and apply high standards in fulfilling their responsibilities for both AML/CFT and prudential supervision. As for AML/CFT, supervisors have to include AML/CFT risk in their risk based approach to supervisions and to be fully aware of consequences and implications of theirs supervised institutions’ failures to adequately identify and manage all risks including ML/TF risk. This is because the issue is no longer just about technical compliance but more importantly, whether the supervisory framework has been effective in mitigating and in ensuring adequate enforcement against ML/TF. Therefore, to equip supervisors in fulfilling their duties to conduct AML/CFT supervision, courses such as this is important to provide all of you with an understanding of the importance of reviewing the operational, legal, and reputational risks associated with ML/TF and their impact on the overall bank assessment. | 0 |
Inflation rates have been falling in most countries and they have registered appreciable expansion in economic activities with GDP growth rates averaging at about 5% in 2007. In addition, most countries have become more democratic in political circles, giving more say to the public on the running of governments and their institutions. Distinguished Participants, allow me now to turn to the subject we are gathered here for, that is, “Central Bank Governance”. Good corporate governance is generally acknowledged as BIS Review 26/2008 1 important in economic management. In this regard, Central bank governance is arguably defined by a number of key-concepts or pillars, which together should form the basis of an effective legal framework governing a central bank and on which central bank governance should rest, that is, operational independence, democratic accountability and transparency. Despite its common usage, it is not always very clear what central bank transparency amounts to. Generally, two definitions of transparency can be distinguished in the policyoriented literature. Firstly, central bank transparency is referred to as the activities of the central bank in providing information. Thus, in this case, transparency has been defined as the degree to which information on policy actions is available. However, a somewhat broader approach to transparency includes the public’s understanding of the decisions taken by the monetary authorities and the reasoning behind it. | The recent redesign of monetary instruments and the yesterday’s cut of reference CB bills interest rate from 4% to 3.75% are aimed towards conducting of policy at optimal level of reference interest rate. Allow me to elaborate. We were preparing the monetary instruments redesign for a longer time period, and made the actual redesign when we considered that the time was right. The economic activity decelerates because the euro area demand is lower and the credit growth rate is below expectations. Moreover, data on the foreign exchange market and foreign reserves and on the trade deficit in the first quarter indicate balance of payments deficit lower than projected. The inflation rate reduced to around 2%, as expected for this year’s average. The banks, instead of investing the household savings, that increase faster than expected, in lending, purchased CB bills, the amount of which increased by Denar 10 billion, i.e. one third in only three months, even though the capital adequacy and liquidity are at exceptionally high levels. The net external borrowing of the country decreased by Euro 220 million only in the last quarter of the last year, and by Euro 280 million, or by one fourth, over the entire last year. Finally, immediately prior to our decision to redesign the monetary instruments, the Ministry of Finance announced cut of budget expenses by 5%. | 0 |
31 Second, translating estimates of financial gain into welfare terms can help when deciding how best to aggregate across different channels to gauge their general equilibrium impact. For example, how do we appropriately aggregate changes to income and wealth in their impact on well-being? And should we focus on percentage or money changes when judging the impact on people’s welfare? 29 Carney (2016) notes that just 2% of households have deposit holdings in excess of £ few other financial assets, and do not own a home. Therefore, “the vast majority of savers who might have lost some interest income from lower policy rates have stood to gain from increases in asset prices, particularly the recovery in house prices.” 30 As discussed in Ball and Chernova (2008) and Clark, Frijters and Shields (2007), for example. 31 Taking the sum of individuals’ utility is consistent with a Benthamite utilitarian concept of social welfare, but other specifications are possible. A Rawlsian specification, for example, would define social welfare as the wellbeing of the worst off member of society. 11 All speeches are available online at www.bankofengland.co.uk/speeches 11 In principle, a welfare-based analysis allows us to answer those questions. Doing so is not, however, simple. In algebraic terms, consider a utility function of the general form: 𝑈 = ∅(𝛼(𝑦), 𝛽(𝑤), 𝛾(𝑋)) Let’s call this Equation (1). 𝑈 is utility, 𝑦 is income and 𝑤 is wealth. To turn our quantitative estimates into welfare-equivalent measures, three empirical uncertainties loom large. | In welfare terms, the biggest gainers from the MPC’s monetary loosening have been the young, though every age cohort benefits overall. The same is true looking along the income distribution, where every cohort gains in welfare terms, even though the same was not true of purely financial gains. Policy Implications Where does this leave us? Let me summarise the key empirical conclusions before turning to policy lessons. I take the key empirical conclusions to be: The material loosening of UK monetary policy after 2007 has had a significantly positive effect on employment, income and wealth, without which average living standards in the UK would be materially lower. These gains have been shared right across the distribution of income and wealth, age and region, though the precise scale and nature of these benefits does differ across cohorts. Very few households across the UK are likely to have been net losers in financial terms from the MPC’s monetary loosening, once all of its effects are take into account. This conclusion is reinforced if we consider the impact of monetary loosening on people’s well-being. In addition to the financial gains from higher income and wealth, many people have benefitted significantly from greater job security and reduced financial anxiety. In welfare terms, these benefits may have been as large as the financial gains. The number of households who have lost out in welfare terms from looser monetary policy is only 12%. | 1 |
I am particularly pleased that the first Managing Director of Access Bank Zambia Limited is a Zambian who is vastly experienced in our financial sector. Finally, as we witness the commissioning of the bank, I wish to warmly welcome Access Bank (Zambia) Ltd to the Zambian banking sector and wish them the best in their operations. Thank you! 2 BIS Review 117/2008 | From the building of the foundation of legal, regulatory and shariah framework, the Islamic Banking Act (1983) to the formation of the first Islamic bank and Takaful Company to instituting Islamic windows concept for banking institutions and encouraging competition amongst the Islamic financial institutions in the nineties (1990s), to establishing key infrastructures and institutional arrangements such as the Shariah Advisory Council and the Islamic Money Market, we are on a mission to be the center for Islamic finance. Today we have a comprehensive system for Islamic finance but as you would expect, because of competition and the fast changing pace of the banking industry, we must continue to strive to maintain the lead in this industry. There are a few pre requisite to maintain this competitive edge. It is the ability of the industry to meet the evolving and discerning needs of the users of Islamic finance and the ability to meet those needs in a timely and comprehensive manner. The solutions to customer needs must be as innovative and competitive as any other alternatives offered by the financial market. The shariah aspect of the products must be recognized and accepted by the majority of players practicing Islamic finance. The supply and ability to attract and retain talent, not only in shariah area and Islamic finance, but also those who are conversant in IT, legal, accounting, risk management and communication. The next level of development will probably entail the enhancement of linkages between various centers, be it in the financial markets, credits or investment of funds. | 0 |
For example, given economies of scale, it is much cheaper for foreign banks to cover their China operations through their Hong Kong offices, rather than incurring the additional costs of setting up a new office in, say, Shanghai. Also, contrary to the established wisdom, the cost advantages are not always on Shanghai’s side: corporate tax, for example, is twice what it is in Hong Kong. Other positive inducements include the efficiency and sophistication of Hong Kong’s financial markets, and the critical mass that goes with being the world’s fourth largest banking centre and seventh largest foreign exchange centre. We have in Hong Kong a pool of professional expertise trained in all facets of international business: a skilled local workforce, which is well educated, computer-literate, productive, disciplined and highly trainable; in addition to a foreign expertise attracted by rich business opportunities and an international, cosmopolitan orientation, with English as the business language. Without wishing to labour the elements that make up a free economy - which the Cato Institute has set out so well - I think it is worth highlighting the point that Hong Kong scores extremely high on all of them. It enjoys the rule of law and the free movement of information, capital and human resources. It has efficient and clean government, a market-oriented economic policy, a non-intrusive but effective regulatory system, and a low and simple tax regime. It treats domestic and overseas companies on equal terms and has a liberal policy on employing foreigners with expertise. | Joseph Yam: The WTO - China’s future and Hong Kong’s opportunity Speech by Mr Joseph Yam, JP, Chief Executive of the Hong Kong Monetary Authority, at a conference co-sponsored by the Cato Institute and the Hong Kong Centre for Economic Research on “Globalisation, the WTO, and Capital Flows - Hong Kong’s legacy, China’s future”, held in Hong Kong, on 4 September 2000. * * * I feel honoured to be invited to deliver the keynote address at today’s conference on the implications of China’s prospective entry into the World Trade Organisation (WTO). This is a timely conference for, although the arrangements for China’s entry into the WTO are not yet signed and sealed, it looks very likely that they will be agreed soon. The Cato Institute takes a special interest in the relationship between economic change and government policy throughout the world, and it is appropriate that it should be following this historic event closely. The Hong Kong Centre for Economic Research - now, I note, more than 20 years old - has established a solid reputation for independent research into public policy and economic affairs: it is therefore well positioned to provide the Hong Kong and regional perspective. It also seems right to me - despite the heavy rainfall we’ve been having this summer - that Hong Kong should be the venue for this conference. The reasons, I hope, will become clear in this address. | 1 |
William J McDonough: Issues in corporate governance Remarks by Mr William J McDonough, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the William Taylor Memorial Lecture, Washington, D.C., 29 September 2002. * * * I am honored this evening to be invited to deliver the William Taylor Memorial Lecture. Bill Taylor was a very special person. He was deeply committed to public service and to the well-being of this nation's financial markets in his many years as head of Bank Supervision at the Federal Reserve Board and as chairman of the Federal Deposit Insurance Corporation. For many of us, he embodied the ideals of a central banker and a bank supervisor: measured, professional, impartial, and unstinting in his willingness to go the extra distance in his search for the right answers to the problems he needed to address. His years in the bank supervisory community were cut all too short. We have sadly missed the benefits of his wisdom. This evening I would like to honor Bill's memory by talking about some issues I know would have been of profound interest to him. Specifically, I would like to focus my remarks on the elements that make for a sound banking and financial system and the issues that have been raised over this past year which have led many to question the quality and integrity of the information available to our markets. | Such an apparatus is also needed to promote the firm's operational efficiency and to ensure compliance with managerial policies, laws, regulations, and sound fiduciary principles. Effective risk management is based on a foundation of good corporate governance and rigorous internal controls. Taking calculated risks is part of any business enterprise. That is well understood. At the same time, each firm needs to have in place the technical systems and management processes necessary not only to identify the risks associated with its activities but also to effectively measure, monitor, and control them. An effective risk management and control structure is not sufficient, however, if it is not accompanied by an institutional culture that ensures that written policies and procedures are actually translated into practice. Ultimately, a firm's culture is determined by the board of directors and the senior management it installs. In particular, the actions of senior management and the consistency of their decisions and behavior with the values and principles they articulate are critical to shaping firm culture. It is vital that managers make certain that their commitment to an environment that includes effective risk management and rigorous controls filters fully down the line to all employees in their organization. Official regulation and supervision provide a second line of defense against financial instability. Governments have long recognized that banking and other financial institutions, because of the nature of the functions they perform, must be subject to at least some form of regulation and official oversight. Governments have a broad mandate here. | 1 |
6 BIS central bankers’ speeches Incentives work in the opposite direction. Nearly all the bank supervisors I have known over the past three decades have invariably been drawn towards the parts of their InBox about individual firms, for the simple reason that that is where their individual accountability is starkest. At its heart, the FPC is a device to overcome this problem. It charges a group of policymakers to step aside from the fray, resisting myopia and synthesising the perspectives of supervision, securities regulation, market operations and macroeconomics, with the goal of identifying and addressing the big developments that could jeopardise stability. Lest it be doubted, that task will, of course, be unachievable without a suitable flow of information from the bank supervisors (and the securities regulators) to the FPC and its staff in the Bank. The FPC’s instruments will not be aimed at individual firms per se. But we are expecting that the Committee will be briefed by Hector Sants’ supervisory team on the circumstances of the most significant firms, and to be informed routinely about shifts in the supervisors’ ratings of firms generally. Symmetrically, the FPC’s concerns will surely help the efforts of the microsupervisors. In particular, the macro perspective can make a big contribution to the design of stress tests of firms’ soundness, whether “top down” stress tests conducted for the FPC itself or “bottom up” stress tests conducted as part of micro supervision. And the markets perspective can help to identify issues or types of firm that warrant closer examination. | To ensure that our financial system serves our economy and society well in the VUCA world, I believe that there are three imperatives we must focus on. These are (1) productivity, (2) immunity, and (3) inclusivity. Allow me to highlight some initiatives that have been implemented to advance these objectives in Thailand. First, on the productivity front, we are committed to supporting the use of technology for greater productivity. Digitization will help enhance efficiency in financial services. There has been remarkable progress in the electronic payment ecosystem. For instance, our PromptPay, which was launched early this year, is among the most efficient faster payment systems in the region. Last week, we launched the standardised QR code for payment services. This was the world-first collaboration from the five major global credit card service providers. These payment platforms and standards will improve convenience and efficiency, and provide foundation for innovative financial services. On building immunity to safeguard financial system resilience, Thai commercial banks constantly maintain high level of capital and loan loss reserves. In addition, we place much emphasis on proper market conduct, good governance, and most importantly, fortifying trust. The Banking Industry Code of Conduct has recently been revised to promote a culture of good governance and ensure fairness in the industry. This year, the Bank of Thailand 5 World Population Ageing Report 2015 (page 2) http://www.un.org/en/development/desa/population/publications/pdf/ageing/WPA2015_Report.pdf 4 embarks on a new initiative to enhance banks’ understanding of risks associated to their behaviour and culture. | 0 |
In return, the p2p lenders will refer borrowers who have completed two successful rounds of fund raising to DBS for larger commercial loans and other financial solutions such as cash management. The road to financial inclusion is neither short nor easy. But it is an important one. Broadening access to financial services will offer Asian banks – and FinTechs – the opportunity to grow their business while serving a social purpose. Financial inclusion will be a key priority in the economic co-operation agenda when Singapore assumes the chairmanship of ASEAN next year. Conclusion You will be discussing many of these issues in the days ahead. I look forward to hearing your insights. It leaves me now to hand over to John Williams for his keynote address. He will speak on US monetary policy – a subject of evergreen interest to the financial industry and central banks around the world. I look out for John’s speeches not so much for clues to what the Fed might do next – though that is of course of great interest too – but for the original insights John provides on some of the deep, conceptual issues in monetary policy. John has made thought-provoking contributions in areas such as the natural rate of interest, or r*, and nominal GDP or price level targeting for monetary policy. It is my pleasure now to invite John to share with us his insights on how we should view monetary policy in a changing world. | In France, credit to the private sector continued to advance at a sustained pace, posting a year-on-year increase of 9.3% in October. The annual growth rate of total domestic debt was 5.7% in October. In the course of the year, the various components of the second pillar signalled upside risks to price stability. This was true for the indicators for supply and labour markets, the continuing rise in oil prices and the protracted depreciation in the euro’s exchange rate, which have exerted or continue to exert upward pressure on import, production and consumer prices. As regards the exchange rate of the euro, which is an important monetary policy indicator, both the Monetary Policy Council and the ECB Governing Council are convinced that the external value of the euro does not reflect the euro area’s favourable situation and future prospects. This sentiment is shared by the Eurogroup, which agreed with the European Central Bank in Versailles that "a strong euro is in the interests of Europe". This phrase is the most concise and clear statement of Europe’s position with respect to the external value of the euro. Moreover, the G7 also concurs with the Eurosystem’s analysis. On 23 September, following the concerted intervention on foreign exchange markets on 22 September, the G7 expressed "the shared concern of the Finance Ministers and the Governors about the potential implications of recent movements in the euro for the world economy". Financial stability In Europe, price stability is the statutory responsibility of the central banks, that is, the Eurosystem. | 0 |
For such situations, the following could usefully apply: Shadow banking vehicles or funds that are sponsored or operated by banks should be consolidated on to bank balance sheets Consolidation might require changes in accounting rules. That could take time. These vehicles and funds should nevertheless be treated as consolidated in the application of Basel 3 regulatory capital requirements etc. If necessary, Pillar 2 should be used to achieve that. (The Basel Supervisors Committee will, I hope, consider this in its contribution to the FSB work). Banks’ provision of committed lines of credit to independent shadow banks Even where a shadow bank is not de facto or de jure part of a banking group, many are fundamentally dependent on banks – through committed lines of credit. Anyone running a maturity mismatch is exposed to liquidity risk – liabilities being called before assets fall due or before they can be sold in an orderly way. Banks can provide insurance against such liquidity risk because their deposit liabilities are money; they can lend simply by expanding the two sides of their balance sheet simultaneously, creating (broad) money. But, for the system as a whole – ie taking a macroprudential perspective – providing committed lines to shadow banks is riskier than providing such lines to non-bank businesses. Shadow banks are liable to call on their lines just when the banking system is coming under liquidity pressure itself. That should be reflected in regulatory policies on banks’ liquidity exposures. | I suggest that: the draw-down rate assumed in the Basel 3 Liquidity Coverage Ratio should be higher for committed lines to financial companies than for lines to non-financial companies. That is, banks should hold more liquid assets against such exposures. Without a policy of that kind, there will be a strong incentive for maturity-transformation to be undertaken off bank balance sheets but with an umbilical cord back to the banking system. It should apply not only to vehicles used for securitisation but more generally. Money funds Money funds do not use committed lines of credit from banks. Claims on money funds have, in effect, become monetary assets in the hands of savers. In parts of the world, especially the US, they are treated like current accounts. Given the restrictions on their asset holdings, they resemble narrow banks, in mutual-fund clothing. But for a normal mutual fund, as an open-ended investment vehicle, the value of investments in it fluctuates with the value of the vehicle’s asset portfolio. By contrast, most money funds hold themselves out as offering par under any circumstances; when they “break the buck”, they must unwind. Their investors run at that prospect; and so the funds themselves are flighty investors. Compared to most types of shadow banking, money funds do not borrow – in the usual sense. But by promising par, they are in effect incurring debt-like obligations. And they can be exposed to leverage. | 1 |
The borrowing terms that a country’s Treasury enjoys from foreign creditors generally serve as a floor for the interest rate offered to the private sector. This makes it crucial to restore the Treasury’s good credit rating. Not only will this pave the way for domestic enterprises to external financing, it will also significantly reduce the likelihood of a fire sale of domestic assets once the capital controls are lifted. The principal task of the economic recovery programme drafted in co-operation with the IMF is to restore confidence in the Treasury’s ability to meet its foreign currency obligations. How can this be done? First, by practicing sufficient fiscal restraint to convince financial markets that, despite a temporary spike in indebtedness in the wake of the banks’ collapse, the Treasury will be fully capable of meeting its international obligations; i.e., that its debt position is sustainable for the long term. Second, the Treasury has to demonstrate that it has access to sufficient foreign currency reserves to repay, if it comes to the crunch, loans maturing over the next two years. We still are just short of reaching this position, as efforts to achieve it have been delayed for reasons known to all of us. Here it is important to bear in mind the 2 BIS Review 64/2010 common saying that banks, domestic as well as international, are ready to offer you an umbrella on a sunny day, only to demand it back promptly once the rain starts to fall. | In recent years weak growth in import prices and rapid productivity growth have been such factors. On the other hand, it may also be the case, if inflation is high and held up by special factors for a fairly long period of time, that interest rates must be maintained at a high level even when economic activity is not so strong. This means that it is also very difficult in practice to determine what is a "normal” level for the policy rate. It is possible to use different methods to calculate an approximate interval for what can be regarded as a normal repo rate. However, this type of interval will of necessity be fairly broad – in a box in the June Inflation Report it was estimated at 3.5-5 per cent. Experiences also show that the repo rate can fall outside of this rather broad range for fairly long periods of time. Given this, it can be observed that estimates of the normal level for the repo rate have a fairly limited value when assessing interest rate developments in the near future and that interest rate decisions cannot be justified merely because the repo rate is deviating from a level regarded as normal. 1 See Monetary policy in Sweden”, Sveriges Riksbank, 2006 (can be downloaded as a file from the Riksbank's website, www.riksbank.com, or ordered in booklet form). 2 Memorandum “Riksbankens inflationsmål – förtydligande och utvärdering”, 4 February 1999, registration no. | 0 |
This reduction in the perceived riskiness of the environment is also likely to encourage financial market participants to increase their holdings of riskier assets and to drive up their prices. A key piece of evidence suggesting that excessively loose monetary policy might have had a part to play in generating the preconditions for the crisis is provided by comparisons of policy rates with the policy settings generated by a benchmark Taylor rule (Taylor, 2007). Chart 1 shows the difference between the policy rate and benchmark estimates of the appropriate policy rate derived from a Taylor rule for the United States, the euro area and the United Kingdom. Notwithstanding the usual caveats about the construction of such benchmarks, the very low level of the Federal Funds rate relative to the Taylor rule from 2001 to 2005 in the aftermath of the collapse of the dot-com bubble is striking. Of course, the Federal Open Market Committee (FOMC) set its target Federal Funds rate at unusually low levels for a reason, namely concerns that the United States might find itself mired in deflation of the sort experienced by Japan during its “Lost Decade”. Bernanke (2010) provides a vigorous defence of Federal Reserve policy over this period, arguing that evidence from a comparison of guideline policy rates from conventional Taylor rules with actual policy rates is unpersuasive. | Prospective members of the euro area are in fact also required to satisfy the other four Maastricht criteria, which relate to inflation, the interest rate, the fiscal deficit and the public debt. I propose to focus on the ERM II criterion for two reasons. First, the timing of EMU membership is conditioned by the two-year period embedded in the exchange rate criterion. In Malta’s case, if it is part of the next enlargement in May 2004 and even if it fulfils the other Maastricht criteria, the earliest that it will be technically able to participate in EMU is mid-2006. Earlier adherence to the other criteria, therefore, becomes almost irrelevant. Second, the obligation to participate in ERM II has implications in terms of the preparations which a national central bank has to make in view of its eventual entry into EMU. This is because it impinges directly on some of the central bank’s main functions – such as the formulation of monetary and exchange rate policy and the management of external reserves – something which is not true, for example, of the fiscal criteria. ERM II is thus of particular interest to central bankers. Against this background, I will now review some issues which eventual participation in ERM II, and later in EMU, raises for policy makers in Malta. No significant change in the parameters governing monetary and exchange rate policy EMU entails the adoption of the euro and the surrender of autonomy in the area of monetary policy to the European Central Bank (ECB). | 0 |
Complex, self-regulation has added speed to the race to the bottom and incline to the international playing field. (b) Complexity and risk-sensitivity One of the conceptual lynchpins of the model-based, self-regulatory approach was the desire for risk-sensitivity. As a matter of principle, it is difficult to question risk-based regulation. The practical question is whether that has been achieved. On the face of it, the very act of risk-weighting assets would appear to guarantee a greater degree of risk-sensitivity than, say, using a risk un-weighted leverage ratio. Yet this intuition is wrong on two counts. Wrong empirically because it ignores the risks which come from modelling. And wrong theoretically because risk across banks’ whole portfolio may bear little relationship to the aggregated risk of each of its parts. Take model risk. This pollutes the signals from a risk-based capital ratio. In work at the Bank, we have explored this trade-off between model risk and risk-sensitivity. If model risk is sufficiently large, a risk-based capital ratio may in fact perform worse in predicting bank default than a leverage ratio. That is because the noise associated with imprecise risk weights can drown out the signal. A leverage ratio, unpolluted by model risk, may provide clearer risk signals. While slightly counter-intuitive, this result is well-understood in many fields outside of finance (Gigerenzer (2007)). It is why complex, risk-weighted algorithms have been found to perform poorly out-of-sample when predicting everything from sports events to medical diagnoses, from shopping habits to portfolio choices (Haldane and Madouros (2012)). | Even with the benefit of hindsight, these steps seem like sensible ones. In particular, there appear to have been three key objectives behind the evolution of international bank regulation over the period. • First, to level the international playing field and prevent a race to the bottom in capital adequacy standards, in particular under Basel I. • Second, to align regulatory capital with risk by improving the risk-sensitivity of capital standards, in particular under Basel II and III. • And third, to reduce incentives to engage in regulatory arbitrage and create incentives to upgrade risk management, in particular under Basel II and III. All of these responses were understandable and, in concept, laudable. The question is whether, with the benefit of hindsight, they have been successful. Unfulfilled ambitions (a) Levelling the Playing Field The rationale for the original Basel Accord is that it would effectively defuse an international race to the bottom by setting a common, internationally-set capital standard. But the use of risk weights, in particular those based on internal models, in calculating banks’ capital ratios has provided an alternative avenue through which this race can be run. And empirical evidence suggests this race may have continued apace. Chart 1 plots the average risk weight applied to the assets of 17 major international banks over the period 1993 to 2011, together with a trend line. The trend is steeply and strikingly downward-sloped, falling on average by 2 percentage points each year. | 1 |
The renminbi exchange rate should also be able to respond more to the underlying trends in external trade. Greater flexibility may also permit exchange rate adjustments in pursuit of other macroeconomic objectives. Should greater flexibility in renminbi be pursued, I believe that there would be advantages, in the interests of transparency and market confidence, for the mainland to set out clearly what it expects to achieve by the measure, especially in the absence of any move towards fuller convertibility. If the benefits are in doubt, or if the underlying motivation is misunderstood, 5 BIS Review 68/2000 there could be an adverse impact on general sentiment, which would be manifested in the financial markets. We all know how sensitive financial markets can be, and this sensitivity somewhat blurs the Hong Kong response to the prospect of greater flexibility in the renminbi’s exchange rate, in particular its impact on the Hong Kong dollar exchange rate. Together with the confusion between the convertibility of a currency and the flexibility in an exchange rate, this sensitivity perhaps explains the rather excited off-the-cuff response given earlier this year by the group of Hong Kong businessmen to Premier Zhu Rongji when the subject was raised in a meeting among them. As a result, there was this message to me that we in the HKMA should examine the matter carefully. We have since done so and I have, in July, provided Premier Zhu with a response, through Governor Dai Xianglong of the People’s Bank of China. | Hong Kong’s banking sector, with its strong reputation and long involvement in mainland business, stands to benefit greatly from the liberalisation in this area, providing that it can position itself to make the best out of the opportunities. In the monetary sphere, the various predictions about the future development of the renminbi in the light of WTO membership - which include the possibility of greater exchange rate flexibility - would most likely have positive implications for Hong Kong’s economy as a whole, and should create no difficulties for Hong Kong’s entirely separate and soundly based currency. The role for Hong Kong in the context of a WTO that includes China, would, I believe, give even fuller scope for the qualities that, in the assessment of the Cato Institute, make Hong Kong the freest economy in the world. All of this therefore leaves a small question in my mind about the title of this BIS Review 68/2000 6 conference, and I hope the organisers will forgive me for raising it. The phrase “Hong Kong’s Legacy, China’s Future” has a bit of a morbid ring about it. It suggests that we in Hong Kong are bequeathing something to China before we breathe our last, and that you are assembled here for a funeral, or at least a deathbed scene. This cannot, surely, be the intention behind the conference. | 1 |
One solution could be to create more flexible groupings within the Fund to discuss particular topics. For example, the Managing Director’s powers to initiate bilateral consultations about the policy choices of individual members could be expanded to cover multilateral issues discussed by the relevant group of members. If this does not prove practicable, other mechanisms will need to be found to introduce the requisite flexibility in how countries come together under the auspices of the Fund. The institution itself, though, also needs to change. The IMF has the great merit of being a universal institution. But it needs greater focus, independence and legitimacy. In terms of focus the members of the Fund, through the IMFC, could usefully restate the Fund’s mandate in terms of global economic and monetary stability. If it is to be able to meet its remit then surveillance should focus at least as much on balance sheets as on exchange rates. The mandate should make clear both what the IMF is responsible for and what it is not responsible for. But producing more focussed surveillance cannot be achieved in isolation from more fundamental reforms of the Fund. In terms of independence the responsibility for the delivery of a new mandate should be placed more firmly in the hands of the management of the IMF. At present, the Board involves itself in every aspect of the Fund’s activities. | The continuing shift of resources to meet the demand for better public services means that private demand must grow much more slowly over the next few years. In turn, that would enable the trade deficit to stabilise and eventually fall back. The second uncertainty facing the UK is the slowdown in the world economy, and, in particular, the downturn in the United States. In 2000, the world economy grew by 4.7%, the highest rate for twelve years. And, stimulated by an increase in productivity growth, the US growth rate had reached almost 6% a year in the first half of 2000. Such a rate was unlikely to have proved sustainable. Over the past five years productivity growth in the United States has risen markedly. Labour productivity growth rose by more than 1 percentage point a year to an average of 2½%-3% between 1995 and 2000. Some of this rise was the impact of new technology on efficiency, and some was the result of greater investment in IT – capital deepening – which added significantly to the amount of capital with which each employee was working. But demand rose even more rapidly than the supply of output, leading to a large current account deficit. The external imbalance was the mirror image of the internal imbalance. So a slowdown in the US was not only unsurprising, it was desirable. But the speed of the turn-round in the US has taken most commentators by surprise. | 0 |
In large part this recovery was underpinned by unusually strong growth in the US, averaging some 4½% over the past 4 years and surging to a peak of some 5½% at an annual rate in the first half of last year – compared with an average rate of 2¾% over the preceding decade. This remarkable strength of the US economy was possible, without overheating, against the background of unusually rapid productivity growth as investment in IT spread through the US economy improving its supply-side capacity. These developments together implied higher corporate earnings growth in the US pushing up the stock market and at the same time attracting massive direct and portfolio capital inflows into the US – substantially from the Eurozone – which comfortably overfinanced a burgeoning US current account deficit and underpinned the strong dollar. However helpful all this was in supporting the world economy it clearly could not continue for ever or without limit. At some point – and no-one could know at all precisely at what point – demand in the US would begin to outstrip supply and the growing external imbalance between the US and the rest of the world would become unsustainable; relative asset prices – including the dollar’s exchange rate – would over-discount prospective US corporate earnings growth and both equity and foreign exchange markets would then become vulnerable to abrupt correction. | Zdeněk Tůma: Statistics – investment in the future Welcome address by Mr Zdeněk Tůma, Governor of the Czech National Bank, at the International Conference “Statistics: Investment in the Future”, organized by the Czech National Bank together with the Czech Statistical Office and the Prague University of Economics, Prague, 14 September 2009. * * * Dear Prime Minister, distinguished guests, ladies and gentlemen, dear colleagues, I am very pleased that the Czech National Bank can host this conference in its premises. It is also our great pleasure to co-organize the conference together with the Czech Statistical Office and the Prague University of Economics – it is the evidence of good, I even would say, above-average relationships between these three institutions. The international conference “Statistics: Investment in the Future” we are opening by this plenary session is the second conference of this kind, organized five years after the first one. But this year’s venue is held in a rather different economic and financial environment compared to the previous conference. The whole world has been affected by the global financial crisis. Let me say a few words about the impact of the financial crisis on our economy. In autumn last year the first signs of the global financial crisis were detected in the inter-bank market. The main cause was a lack of confidence among banks spreading from abroad, resulting in their preference to keep more liquidity than usual. | 0 |
Let me discuss these scenarios in turn. The Phillips curve provides a useful framework for assessing the impact of growing economic slack and inflation expectations on price developments. In its most basic form, this theory posits that the inflation rate depends positively on the expected rate of inflation and negatively on the degree of slack in the economy, as measured, for example, by the difference between the supply potential of the economy and aggregate output, in other words the output gap. With euro area GDP falling at an annual rate of 4.8% in the first quarter of 2009 and unemployment rising to 9.2% in April, there is little doubt that spare capacity is high. This should exert downward pressure on prices. But how strong is this downward pressure, and can it determine deflationary risks for the euro area? Precise estimates of the Phillips curve for the euro area are subject to controversy. They vary depending on the specification, the precise measures of the output gap and expectations used, and the time frame considered. However, the general indication from the existing studies is that, on average, relatively large and persistent changes in the output gap are needed to affect euro area inflation. 5 In comparative terms, these changes are much larger than, for example, in the US and the UK. A simple plot (slide 9) of the evolution of various measures of the output gap against that of inflation for the euro area confirms that 5 See, for example, Musso, Stracca and van Dijkx (2007). | It plots the latest HICP inflation forecasts from the Euro Zone Barometer – a publication that produces macroeconomic and financial forecasts every month from a number of major economic forecasters in Europe. In this month’s edition, forecasters expect the spell of negative inflation in 2009 to last on average for a few months. Looking at the range of individual responses (which is shown as a shaded area), there is some disagreement between the highest and lowest forecast. But even in the lowest forecast, the period with negative inflation rate is expected to last no more than two quarters. Furthermore, according to the same survey, inflation projections for 2010 have been gradually revised downwards since January 2009 as economic conditions have deteriorated. This phenomenon is illustrated in slide 8, as a month-to-month shift to the left of the inflation forecasts. Nevertheless, the median projection still remains above 1%. So, if there is no evidence of a generalised and persistent fall in the price level in the latest inflation outturns, what is underpinning current deflationary fears? As I see it, when people think about deflation, they have in mind two possible scenarios. The first is that the accumulation of economic slack due to the recession may exacerbate downside risks to price developments, which in turn may lead to outright deflation as monetary policy loses traction in stabilising output. The second scenario is that a spell of negative headline inflation rates – perhaps due to the temporary impact of energy and food prices – might dislodge inflation expectations. | 1 |
Bearing in mind what we have learned about the importance of financial markets in a highly integrated monetary union, taking measures to ensure a stable and well-ordered financial system in the euro area has to be our first priority. What does this imply in practical terms? First of all, a single supervisory mechanism for banks. As I outlined above, a single financial market combined with national supervision is not sustainable. Before the crisis, it led to a lack of oversight of cross-border activity. Since then, it has facilitated a retrenchment of bank lending behind national borders. A single system of supervision can reduce these risks by allowing for an aggregated view of the euro area financial market; by providing a safeguard against regulatory capture; and by ensuring that national interests are not put ahead of the European interest. With this in mind, the Commission has presented a proposal for the establishment of a Single Supervisory Mechanism, entrusting the ECB with specific supervisory tasks. This is a welcome development and the ECB is ready to assume these tasks. However, it is essential for the credibility of supervision, and for the ECB’s reputation, that the legal framework allows us to implement these tasks in an effective and rigorous way. | Már Guðmundsson: Financial integration and central bank policies in small, open economies – what are the key lessons from the crisis? Remarks by Mr Már Guðmundsson, Governor of the Central Bank of Iceland, in a plenary session on monetary policy and policies of central banks at the Singapore Economic Review Conference, Singapore, 5 August 2015. * * * A revised and extended version of this talk will be published in a forthcoming Singapore Economic Review. Chairman and participants, I would like to thank the organisers for inviting me to speak at your conference here in Singapore, a country that I have long respected for its economic management. My remarks today bear the title Financial integration and central bank policies in small, open economies: what are the key lessons from the crisis? They are motivated by my experience as a policy-maker from a very small, open, and what used to be financially integrated economy, and my tenure at the Bank for International Settlements. 1 There is a widespread sense that global financial integration can be problematic for the conduct of monetary policy in small, open economies. Why is that? It is well known that the transmission mechanism of domestic monetary policy evolves as domestic financial markets develop, and that this in turn affects the relative effectiveness of different monetary instruments. The same applies to external liberalisation of domestic financial systems and the cross-border financial integration it gives rise to. Initially, it can give a boost to domestic financial market development. | 0 |
The other is how difficult most of us in western Europe find it to understand how rapidly things are moving and how much has already occurred in these countries. The image of a west European with shopping bags full of aid to the poor neighbours in the east still remains, while we are incapable of seeing how much we can pick up from the new member countries. How poor are the candidate countries? I should like to begin with a critical examination of the picture we normally give of the applicant countries. Two common illustrations of the economic side of the EU enlargement eastwards are graphs showing the development of production since the fall of Communism and a table of the income differences between east and west. If we look at the statistics summed up in the European Commission's reports, GDP per capita adjusted for purchasing power (PPP), the gap certainly looks huge. The riches of the 10 central and east European candidate countries, Slovenia, with 72 per cent of the EU average, and the Czech Republic, with 60 per cent of the EU average, are around as poor as countries like Greece, Portugal and Spain were before they joined the EU. However, the poorest countries in the applicant group, Bulgaria and Rumania, have only approximately 25 per cent of the EU average. The graphs for production levels since 1990 look equally gloomy, only at the end of the 1990s do they reach the same level as at the fall of the Berlin Wall. | Might it be preferable in select cases for a systemic infrastructure to declare a settlement holiday, unpalatable as that may be, or to work with relevant industry associations to declare that select markets are closed? Are the operational challenges of conducting manually activity that is fundamentally dependent upon automation a bridge too far? Do reconciliation challenges that become exponentially more complex as a disruption event extends in duration risk prospects for an orderly return home? Might industry dialogue to agree on the accepted circumstances and corresponding practices for dealing with a settlement holiday in a pre-meditated manner prove to be a superior course? These questions are not easy to answer, but it is very important in the present evolution of industry discourse that they are asked. Provocative Question Number 4: To what extent do measures to address endpoint security risks, such as anomaly detection and assurance regimes, compel a new paradigm for the attribution of liability in the end-to-end payment transaction flow? The reality that endpoint security breaches can undermine confidence in a network even when an operator’s infrastructure has not been violated has spawned a novel body of work, including initiatives to enhance assurance that external endpoints are operating in adherence with an operator’s strict security requirements, and the development of application tools such as anomaly detection to enhance a participant’s management of fraud risk. | 0 |
And for the new challenges to be met and the new opportunities to be exploited, there is often the need for new approaches and new initiatives, at both the national and international levels. There is a view, for example, that trade integration in the region has not been adequately served by financial integration, given restrictive controls on capital mobility still being practised in selected jurisdictions. As a result there is some doubt as to whether the long term development potential of the region has been maximised and whether the rapid economic growth the region is experiencing is sustainable. There is further concern from the point of view of the maintenance of monetary and financial stability. New approaches and new initiatives are indeed necessary to promote greater financial integration in the region. I am sure there are many other areas concerning development of the region in which new approaches and new initiatives may be desirable. Being a regional financial institution of strategic importance, it is obvious that the ADB has a significant role to play. I would argue that this should be a role of increasing significance, or even a pivotal role, given the increasing interdependence among jurisdictions within the region and therefore the greater need for regional co-operation. The ADB has the right institutional framework for promoting such co-operation, and I am glad to see that under the leadership of the President there has been increasing involvement of the ADB in regional financial cooperation recently. | The Financial Mediation Bureau aims to serve as a one-stop center for the resolution of retail consumer complaints against financial institutions regulated by the Central Bank. The Central Bank is also establishing a one-stop service centre in the Bank that will function as a Public Information Centre for the promotion of financial literacy among the Malaysian public. The service centre will provide advisory services on financial matters to small and medium enterprises. Ladies and Gentlemen, Concluding remarks Financial literacy among women is all about having sufficient awareness of financial matters to enable women to protect and prosper for themselves and their families in a world that is becoming increasingly more complex and uncertain. To be an effective participant in this modern economy, we cannot take financial literacy for granted. It is a knowledge and skill that must be deliberately pursued. From a national and institutional perspective, promoting financial literacy must be an integral part of the overall agenda for financial and economic reform and development. Let me conclude with the words of Jawaharlal Nehru, “We talk of revolutions, political and economic. And yet the greatest revolution in a country is the one that affects the status and living conditions of its women. It is in so far as our revolution has affected our women that it is basic.” Thank you. BIS Review 64/2004 5 | 0 |
Turkey has a good record for structural issues. We have liberalized the trade and capital accounts of the balance of payments for about two decades. We have a flexible labor market. High domestic savings is one of the main characteristics of the economy. Market oriented economy is another aspect of the structural component of Turkey. Right now, Turkey has four important structural reforms on its agenda, not only as a part of the disinflation effort but also because they are essential for changing the environment. Thus, these structural reforms are vital for adapting to the changing global environment. They consist of reforming the banking sector, the social security system, agricultural subsidies, and privatization. Some of these reforms have already been approved by parliament, and the others are in the pipeline. The new Banking Act which was approved by parliament in June has the following four general objectives: • to close the legal loopholes; • to implement the international supervisory regulations; • to assign the supervision of banking organizations to an independent agency; and • to make some adjustments regarding the process of founding and operating banks. In particular, the twenty-five Core Principles for Effective Banking Supervision drawn up by the Bank for International Settlements in 1997 have been endorsed in the amendments to the Banking Act. As a result, the amendments are consistent with modern principles of effective banking supervision. | 11 The Way Forward The mutually reinforcing relationship between the regulatory framework and market good practice should help the FMSB, and other market standard-setters, maintain their ambition and momentum even once memories of post-crisis misconduct fade. It could sharpen collective incentives to address, more conclusively, outstanding ambiguities that act as obstacles to real markets. And it should help mitigate emerging vulnerabilities. The Bank of England encourages the FMSB to consider where additional guidance and worked examples could buttress its existing standards, to guard against the risk that certain principles mean different things to different parties. The City’s special responsibility, given its pre-eminent position in global markets, is why it has brought so many ideas and such energy to advance reforms to address the misconduct risk that has plagued global markets. 10 See page 16, Financial Reporting Council (FRC), “Corporate Culture and the Role of Boards: Report of observations”, July 2016. In light of its responsibilities for conduct and market integrity, the FCA is consulting on an approach under which it would formalise that in supervising to, and enforcing, SMR rules for unregulated markets and activities, it would consider whether firms and individuals are meeting “proper standards of market conduct” with reference to “recognised” industry codes. | 0 |
Our assessment however raised some important questions around how the system operates – particularly whether calling cash variation margin intraday can be made to work more effectively. The frequency and timing of these intraday calls, particularly when issued ad hoc, was not always sufficiently clear to all participants, further complicating liquidity management issues for some. In some instances, unexpected or late-in-the-day margin calls posed operational challenges to making timely payment for some participants. These challenges around the predictably of variation margin calls reflect a wider issue of transparency in the margining process. Most CCPs provide tools that allow clearing members and clients to calculate margin requirements for existing portfolios as well as changes to portfolios that participants expect to make. Some CCPs also provide additional functionality allowing participants to calculate margin requirements under “what if” scenarios. On the other hand, many banking and non-banking participants reported to us that margin calls were insufficiently predictable, with considerable uncertainty over the scale and the speed of increases they were likely to face over a given time period, or for a given level of volatility. Participants reported that the availability of more information on how the models are calibrated and the wider provision by CCPs of high quality margin calculators and other tools, would enable them to generate forward-looking predictions of margin requirements at portfolio level. The surveys also revealed a picture on whether market participants were prepared adequately for margin calls in a severe stress. | I have, since those events, heard two views that, as a central banker responsible for financial stability, give me considerable concern. The first is that there was ‘nothing really to see here’. After a brief period of disruption, understandable given the nature of the shock, markets returned to normal and indeed were able to support the economy through the pandemic. Implicit in that view, of course, is that absent central bank intervention markets would have returned to order and stability. I simply do not believe that is the case. One cannot of course know for certain what would have happened if central banks had stood aside. But by the time central banks were forced to step in, market flows had become almost entirely one way. In a period of huge uncertainty, once the flight to safety had become a dash for cash, there was no-one other than central banks able and willing to step in to catch the falling knife. Absent the massive intervention I described above, core markets would have continued to seize up and the liquidity crunch would have become worse. Indeed, though concerned with bank rather than market liquidity, the experience of the Great Financial Crisis was certainly that once powerful and adverse liquidity dynamics set in, they do not go away by themselves. The second view that gives me some concern is that in a severe shock, in a tail event, it is the role of central banks to underpin market liquidity. | 1 |
Svein Gjedrem: The outlook for the Norwegian economy Address by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), for Norges Bank’s regional network, Region East, Oslo, 25 September 2009. * * * Please note that the text below may differ slightly from the actual presentation. The speech is based on the assessments presented at Norges Bank’s press conference following the Executive Board’s monetary policy meeting on 23 September and Monetary Policy Report 2/09. It has been a year since financial turbulence developed into a full-blown crisis. The result was the most severe downturn in the global economy since the Second World War. Key rates were set at historically low levels both in Norway and abroad. Government spending has increased considerably to support demand for goods and services. Global economic activity is now picking up, albeit from a very low level, and unemployment is high. Financial market conditions have improved, although liquidity remains tight in many markets. The financial crisis eroded confidence in banks, counterparties and contractual partners. Access to export credit came to a halt, international trade slowed sharply and manufacturing sales stalled. With financial markets improving over the past six months and an increase in the credit supply, global trade is now picking up slightly. Manufacturing output has recently increased in the US, the UK, Japan and many emerging economies, while it continues to fall – albeit at a slower pace – in Sweden and the euro area. | Our togetherness in the EMU gives us “a greater say in international negotiation” and enhances our “capacity to influence economic relations” – to quote the Delors Report.2 Over the past 20 years, the euro has become the second most important currency in the international monetary system. Somewhere between 20% and 40% of global foreign reserves, foreign exchange transactions, international debt and international trade transactions are denominated in euro. And over 50 countries or territories use or link their currency to the euro.3 This global standing brings benefits. For one, it lowers the transaction costs of trading internationally, making euro area firms more competitive. It also adds breadth and liquidity to euro area financial markets, allowing domestic and international investors to allocate economic resources more efficiently. And it lowers the cost of global capital market financing for euro area borrowers, including corporations, financial institutions and public entities, thus benefiting firms, households and taxpayers. Of course, the international role of the euro also brings challenges, such as greater exposure to global foreign financial developments and potential changes to the monetary policy transmission process. The international benefits of sharing a currency go beyond the monetary sphere. In a world with deep economic and financial interlinkages, international cooperation is essential and we can more effectively promote European ideas and interests by speaking together. Indeed, the euro area’s voice has been crucial in strengthening the international financial regulatory framework after the global financial crisis. | 0 |
The ECB Governing Council has increased its policy rates by 200 basis points since July: we have moved closer to the neutral rate which we estimate to be around 2%, and which we should reach at our next meeting on 15 December. Let us be clear: this rate rise is good news for banks and insurers, who have long been critical of low rates. Financial institutions want the rise to be orderly: it is, very much so; but this does not mean it should be too slow, or predetermined. It is still too soon to talk about a "terminal rate": we will decide what is necessary following a meeting-by-meeting approach; and we do not steer market rates, which are sometimes excessively volatile. The return of volatility in the markets, starting with commodity markets where margin calls reached historic highs this summer. In equity markets, after the corrections observed since the start of 2022, valuations remain relatively high. Fixed income markets are also showing strong volatility, with one extreme example being the September UK sovereign debt crisis: aside from a few specific factors, this was a reminder to everybody of the crucial importance of credible fiscal policies. In light of this market volatility, it is more important than ever that we protect customers. I would just like to say a word here on the increased transparency and justification of life insurance fees: in a speech to you alongside Jean-Paul Faugère, I called for progress to be made this year, with a particular focus on dialogue with insurers. | It is high time therefore that we made progress on reinforcing the regulatory framework for NBFIs, both on a micro and macroprudential level. As an example, in the case of money market funds, in times of extreme liquidity stress, the competent authorities should be able to release liquidity buffers for funds that are in difficulty, but should also be able to activate appropriate liquidity management tools. I would also like to draw your attention to three other non-bank risks: cyber risk, the frequency and cost of which are very likely to rise with the war in Ukraine. In the EU, the DORA regulation will come into force in 2025 and will at last provide a solid and common framework for making the financial sector more resilient to cyber attacks and for monitoring critical third parties such as cloud platforms. real estate markets, where housing prices had risen by close to 9% (year-on-year) in June 2022 in the euro area, much faster than household income. At this stage, the risks linked to a turn in the cycle are limited in France, thanks, among other things, to our macroprudential measures to make housing loan production sounder. We remain very vigilant, however, including with regard to the other segments of the market such as commercial real estate. crypto currencies, with the successive collapses, the most recent being FTX, that have triggered sharp market corrections and a "crypto winter" that has lasted for nearly a year: their recurrence shines a stark light on the need for stronger supervision. | 1 |
The current financial crisis is unprecedented in terms of its scale, complexity, and speed of transmission. While the series of coordinated actions by financial authorities and Governments have helped to stabilise the markets somewhat, sentiments remain fragile, and many of the underlying problems remain. Many reasons have been offered about the root causes of the current crisis. Let me just highlight a few of these. The first is the unprecedented levels of leverage taken on by global financial institutions coupled with very loose lending standards in the credit markets. Consumers in the US were also highly leveraged. The high leverage enabled asset values and consumption to be raised to unsustainable levels. When sentiments finally turned, there was massive deleveraging. The second is that complexity magnifies risks. The proliferation of complex securities and derivatives had not diversified risk amongst different counterparties as was originally intended, but instead increased aggregate systemic risk throughout the financial system. Not only banks and investment banks were affected but a whole range of players including credit insurers, hedge funds and investors in asset-backed commercial paper have also suffered major losses. 1 Source: CBB website, http://www.cbb.gov.bh. AAOIFI - Accounting and Auditing Organisation for Islamic Financial Institutions; LMC - Liquidity Management Centre; IIFM - International Islamic Financial Market; IIRA Islamic International Rating Agency; WIBC – World Islamic Banking Congress. 2 CBB was then known as the Bahrain Monetary Agency. BIS Review 147/2008 1 The third is the inadequate assessment of risks and compression of yields. | Theoretical models often assume the existence of a central bank reaction function. A well-known reaction function can be a powerful tool in stabilizing output and inflation because yield curves can adjust in anticipation of future policy in line with the evolving outlook for the economy. To return to my football theme, Mervyn King referred to this as the Maradona theory of interest rates. But credible reaction functions don’t fall from the sky and need to be earned by communicating and acting consistently through time. We are and will remain predictable for our stakeholders. Through its forward guidance, the Governing Council has also indicated its intention to move gradually and in accordance with the data. Faced with uncertainty about the strength of the transmission mechanism, we should be guided by pragmatism - the level of inflation relative to the medium-term objective and gradualism. The final C is for clarity. Central bankers should try to spell out what they will and won’t do as much as possible. On the first part, we were clear in Riga; on the second part, let me stress that we cannot fully compensate for the uncertainty created by other policy-makers; nor can we fully offset their effects. We have shown in the past few years that monetary policy is flexible, and we have been willing to use every instrument within our mandate to respond to too low inflation. | 0 |
Our regulatory focus going forward will take into account the potential for greater market transparency and competition. Market discipline will be strengthened. The regulatory framework will be improved to ensure that e-payment services remain secure and reliable. Regulators will not be the cause for bankers’ inertia. In the coming months, the Bank will introduce minimum standards for the nascent but growing area of mobile payments. Mobile payment providers will be required to disclose key security features of their services, such as in-app safeguards against malware and protection against unauthorised transactions. This will make it easier for consumers to compare between different providers, thereby promoting greater consumer empowerment to make better informed decisions. Thirdly, enhancing customer awareness of basic safety tips is paramount as a first line of defence against payment fraud. This is particularly relevant for the emerging modus operandi of social engineering, where fraud victims are duped into disclosing confidential information that are used to commit fraud. In this regard, the industry can do much more to educate consumers. Consumer education initiatives have to be more targeted. They should be designed to address specific modus operandi that are known to be prevalent or emerging. The messages should be simple and tailored to the diverse profile of payment users. This should also account for demographic, behavioural and psychological factors that may be at play. Financial institutions must also regularly review and measure the effectiveness of consumer education initiatives. If the results are not satisfactory, then the strategy must be changed. | The Bank will continue to collaborate with the industry in the area of public education and awareness. The Bank will be working with both bank and non-bank players to develop common promotional messages that provide “do’s and don’ts” for e-payment transactions. This will ensure a more cohesive communication strategy to amplify the impact on the public at large. Concluding remarks When I started, I highlighted the lack of public awareness on the payment system despite its importance as one of the key pillars of the financial services industry. Times have changed. Widespread digitisation, disruptive technologies and heightened competition have reshaped and magnified the potential of payment services. We should be bold in taking advantage of this great potential to deliver e-payments for all and realise the aspiration of making Malaysia a cashless society. Before I close, I would like to congratulate the winners of today’s ceremony. May our achievements today inspire even greater ones tomorrow. 5/5 BIS central bankers' speeches | 1 |
However, these are not the only developments which have the potential to revolutionise our monetary order. Another agent of change is technological progress, which has fundamentally altered the way we pay for goods and services over the course of time, and will continue to do so in future. Moreover, in our direct democracy, sovereign voters make decisions which may alter the institutional foundations of the monetary order. Examples of this are the gold initiative, which we will be voting on in a week, and the plain money initiative, for which signatures are still being collected. Given this situation, you will understand that I cannot make any predictions about what our monetary order will look like in 60 years’ time. In my introduction I stated that sound money is a central pillar of our society. What makes money – or a currency – sound? Money is sound when it fulfils its functions as a means of payment and store of value as smoothly and reliably as possible in people’s everyday lives. A sound currency retains its value and everyone can be sure it will be generally accepted as a means of payment. In Switzerland, the state has played an important role in the development of the monetary order since the foundation of the modern federal state. In this process, the first invariable has been very obvious – it is that efforts to ensure sound money in the interests of the population as a whole have always been a state responsibility. | A second important invariable in our more recent monetary history is the fact that, in this country, this fundamental trust and the culture of stability are deeply rooted. Making money even better? Alternatives to the present monetary order Can we make our sound money even better? In order to answer this question, let us begin by recalling the basic framework of the current monetary order. As an independent central bank, the SNB is required to pursue a monetary policy in the interests of the country as a whole. It has a mandate to ensure price stability while taking due account of the development of the economy. This mandate is the compass that guides all our actions. By guaranteeing price stability in word and deed over the years, the SNB, as an independent institution, has been able to build up its credibility. Credibility is the anchor needed so that the public at large has confidence in our paper currency. This confidence, in its turn, makes it possible for the SNB to react flexibly in the short-term to economic disruptions, because the public does not question its policies aimed at long-term stability. In view of the major economic and social importance of the monetary order, as outlined previously, it is legitimate and necessary that this order be subjected to repeated review. In this sense, we welcome the general growth in interest in the monetary system, following the turmoil of the financial crisis, and the fact that discussion on reform ideas is more lively than in the past. | 1 |
It should be abundantly clear by now to any financial institution that is serious about VBI, that, the task of building the human and intellectual capital to achieve and sustain value-based business models cannot be left solely to the human resource departments. It requires nothing less than strategic direction and resourcing decisions at the highest levels of the organisation. Changing mindsets Einstein once said “The world as we have created is a process of our thinking. It cannot be changed without changing our thinking”. The world today continues to push the limits of social and environmental thresholds, that are posing increasingly serious threats to humanity. VBI is therefore, much more than a current and passing fad, but a deeper conviction of the critical need 3/4 BIS central bankers' speeches to begin the process of changing mindsets in a lasting way. Financial institutions are a key, but not the only catalysts in this process. Customers and investors need to be supported with relevant information, along with the means and ability to compare such information, in order to better understand the value propositions of Islamic finance. The encouragement of pension and institutional funds with a sustainable investment orientation, particularly in markets where such funds remain largely underdeveloped, would be important to provide a stronger impetus for VBI. Credit rating agencies could also be important contributors to a new landscape, with stronger emphasis on economic, social and environmental sustainability in assessment frameworks and methods. | Post-financing expert advisory services which help borrowers mitigate the environmental impact of projects financed by the bank will feature more prominently in the product and service offerings of VBI banks. VBI-oriented Islamic financial institutions can, and indeed should, also play an important role in mobilising resources to finance climate change mitigation and adaptation initiatives. Funding for climate adaptation in particular, remains critically low, despite millions already at risk from the effects of climate change and in need of assistance to cope with the effects. For example, in the agriculture sector, resources can be channelled towards building flood defences, and developing local structures and facilities that are more resilient to harsh weather conditions. Takaful solutions also have an important role in strengthening resilience against climate events. These developments are likely to see important changes to the way financial institutions make decisions, and to the characteristics of banking and takaful portfolios. In supporting these changes, two new tools will be published by Bank Negara Malaysia today for public consultation – a VBI Impact Assessment Framework (VBIAF) and the VBI Scorecard. The Assessment Framework provides guidance on the assessment of financing and investment applications taking into consideration economic, social and environmental impacts, while the Scorecard supports the implementation of performance measurement frameworks for Islamic financial institutions that drive positive value and impact on society and the environment. I look forward to receiving constructive feedback from the industry and interested parties, and to further strengthen these frameworks to drive a renewed focus on sustainable financial solutions. | 1 |
That moment in 1972 became part of a number of further positive decisions that put Romania in the global economic family: joining the General Agreement on Tariffs and Trade (GATT) in 1971; acquiring preferential trading status with the European Common Market in 1973; being granted the most-favored-nation status by the United States Congress in 1975; obtaining facilitated access to credits from the Export-Import Bank and the Commodity Credit Corporation (CCC). Over the same period of time, mixed capital companies were established in Romania as well as abroad, including, within the banking sector: Banque Franco-Roumaine, Anglo-Romanian Bank, Banca ItaloRomena, Frankfurt Bukarest Bank AG, MISR Romanian Bank. The brand of the American bank - Manufacturers Hanover Trust - was visible in University Square, right in the heart of Bucharest, and in premium data technology RomControlData was operating in the country. Unfortunately, during the 1980s the authorities in Bucharest weakened the relationship between Romania and the West, including those with the Bretton Woods institutions, almost close to severing all ties. After the fall of the communist regime, the normalization of the relationship led to a new beginning. As a partaker to these events, I can say that this process with the IMF and the World Bank was hardly an easy one, especially due to the lack of trust that had fallen over Romania's international economic relations. Part of the normalization of the relations with the international organizations was also joining the International Financial Corporation (IFC) – member of the World Bank Group in 1991. | Mugur Isrescu: 50th anniversary of Romania's entry to the circuit of international financial institutions Speech by Mr Mugur Isrescu, Governor of the National Bank of Romania, on the occasion of 50 years since Romania joined the International Monetary Fund and the World Bank, Bucharest, 31 January 2023. *** Distinguished audience, In December 1972, Romania joined the International Bank for Reconstruction and Development (World Bank) and the International Monetary Fund (IMF). At that time, Romania was the first – and remained until 1989- the only country from the Treaty of Warsaw and COMECON (Council for Mutual Economic Assistance) that had entered the circuit of international financial institutions. To mark this anniversary, the National Bank of Romania has launched into circulation, for numismatic purposes, a silver coin. The obverse of the coin depicts the Old Palace of the National Bank of Romania, the inscription "ROMANIA" in a circular arc, the coat of arms of Romania, the face value "10 LEI" and the year of issue "2022". The reverse of the silver coin has the logos of the International Monetary Fund and the World Bank and the inscriptions in Romanian "ROMANIA'S ACCESSION TO THE INTERNATIONAL MONETARY FUND AND THE WORLD BANK" and "50 YEARS". | 1 |
Ravi Menon: ASEAN financial integration – where are we, where next? Keynote address by Mr Ravi Menon, Managing Director of the Monetary Authority of Singapore, at the ASEAN Banking Council Meeting, Singapore, 12 June 2015. * * * Dr In Channy, Chairman, ASEAN Bankers Association Mr Samuel Tsien, Chairman, Association of Banks in Singapore Ladies and gentlemen, good morning. ASEAN banks have performed well over the last two decades since the Asian Financial Crisis. Asia’s economies and financial systems, including those in ASEAN, generally held up well during the Global Financial Crisis. The near term economic outlook for ASEAN will be shaped by two themes: the ongoing recovery in the G3 economies and the slowdown in the Chinese economy. Barring shocks, overall growth in ASEAN should remain firm this year, at about 5%, not spectacular but very respectable considering the state of the global economy. Macroeconomic conditions are therefore supportive of banks in ASEAN. There are, however, downside risks they need to watch. • The divergence in monetary policy settings among the G3 economies could pose risks to financial stability that could also potentially hurt growth. • The anticipated normalisation of interest rates in the US against continuing quantitative easing in the Eurozone and Japan is already causing sharp movements in exchange rates and bond yields. The scenario of a “double whammy” posed by a rise in US interest rates and a strong US Dollar could expose vulnerabilities among some ASEAN borrowers. | Economic and financial integration in ASEAN owes at least as much, if not more, to the natural functioning of market forces as it does to official initiatives like free trade agreements. Integration in ASEAN, more so than it has been in the European context, is a bottom-up, organic process driven by: • trade and investment flows arising from the production networks of global MNCs spanning the ASEAN region; and • cross-border capital flows arising from the operations of global and regional banks. BIS central bankers’ speeches 5 The success of ASEAN financial integration therefore requires active industry collaboration and participation. The industry has an important role to play in working with regulators and governments to identify and clear roadblocks to growing their business across borders. The ASEAN Bankers Association, representing the banking associations across all ASEAN members, is well placed to play this role. • Coming from the industry, you know what makes commercial sense, where the specific obstacles are, and you know how to persuade your governments and regulators to press on with economic and financial integration. • I wish you fruitful discussions and look forward to your ideas. Thank you. 6 BIS central bankers’ speeches | 1 |
But it will strive to supervise institutions without placing unnecessary regulatory burdens on well-managed individual institutions or inhibiting the innovation and dynamism of the financial sector. Compliance costs of supervisory actions will be commensurate with the risks posed by the individual institutions. We will seek consistency in applying equivalent prudential and market conduct standards to financial institutions conducting similar business activities that are subject to the same risks. Harmonising and integrating regulations and supervisory practices across financial activities will reduce opportunities for regulatory arbitrage. Working towards more win-win outcomes for Singapore and the region Second, we must work towards more win-win outcomes for Singapore and the region. The growth and development of Singapore depends on the health of the world economy, and the wellbeing of our neighbours and trading partners. As a hub and gateway in this region, Singapore benefits if the region is competitive and attractive to investors and new businesses. Southeast Asia must work together to make itself more attractive, especially with new opportunities and competition arising in North East Asia. Last month, ASEAN leaders agreed in Bali to build an ASEAN Economic Community by 2020 - a single market and production base with free flow of goods, services, investments, capital and skilled labour. Asian countries need to foster closer cooperation and integration between financial systems and markets in the region. This will facilitate the financing, and payment and settlement of intra-regional trade. | It is up to the Singapore banks and their shareholders to consider these opposing arguments and continually reassess their strategies. They will need to decide whether they need further scale to compete effectively, and if so whether it should be achieved through consolidation at home, expansion and acquisition abroad, or a combination of both. MAS cannot make this judgment for them, though the continued strength of our banking system depends on their making the right judgment call. Whatever the outcome, we need a core of strong local banks, as the stability of our financial system hinges on that. Overall, the prospects for our financial centre look good. Last year, employment fell slightly because of mergers, consolidation and the general economic weakness, but the worst seems to be behind us. More jobs are being created by the new activities that are being attracted here and by expansion in 5 FitchRatings, The Singapore Banking System, 19 Apr 2002. established areas like wealth management. The financial sector will continue to be an important contributor to economic growth. IV. Progress review of MAS’ 2003 business priorities Let us now briefly review how well MAS has achieved its business priorities over the past year before we focus on what we must do to grasp the opportunities arising from the financial services upturn. Managing within a riskier environment First, managing within a riskier environment. The financial industry is ever-changing - risk management practices are constantly being tested and challenged by new business models and financial products. | 1 |
At the recent release of the 2018 Financial Stability and Payment Systems Report, Bank Negara Malaysia reported that financial institutions in Malaysia will continue to support economic activity, including to households for affordable housing. Loan disbursements and net financing to households grew healthily last year by around 6.7% and 4.7% respectively. The approval rate stood at 71.3%, with around 70% of loans for first time buyers of properties priced below RM500,000. Finally, for policymakers, our role is to continue pursuing greater coordination with the private sector to build a sustainable housing market. In Malaysia, various initiatives have been announced to support this agenda, including the launch of Bank Negara Malaysia’s Fund for Affordable Homes, the National Home Ownership Campaign, stamp duty exemptions and provision of mortgage guarantees and rent-to-own schemes. While we are seeing a gradual rebalancing of housing supply towards the more affordable segments in Malaysia, it is important that future supply is tailored to the needs of future demand. As such, moving forward, it will be critical for Malaysia to accelerate the establishment of an integrated housing database. The database would be important to provide timely information to help build an efficient housing market through greater transparency and lead to better planning by policymakers and developers. The newly established single authority for affordable housing should play a proactive and strategic role in managing affordable housing in Malaysia. Local authorities and developers should also work together to reduce the cost of building houses. | In addition, there is now a broad consensus on risk measurement approaches. The main point that is still undecided and which continues to occupy the Committee members is the setting of the so-called “output floor” for banks that apply internal models. Let’s be clear: I read and hear the banking industry, and French banks in particular, giving its advice for negotiations on this point. A little restraint would not go amiss, and it is not our intention to defend corporate interests. If an output floor of 75% is not acceptable, it is because this floor – and consequently the standardised approach – would become the constraint for half of the international banks. I must stress that our goal is to finalise Basel III, based on improved models that remain risk sensitive, and not to move onto Basel IV, which would use the standardised approach. Therefore, an agreement must be reached on a lower output floor along with a tightening of controls over the banks’ internal models, much like the targeted review of internal models (TRIM) that was approved for the Single Supervisory Mechanism and the results of which we are more than willing to submit to peerreview. This stance is shared at the very least by other European countries such as Germany and the Netherlands, and by the European Commission. International cooperation on financial reforms is a common good that has been extremely precious during these past eight years and is crucial to our future. | 0 |
But if we can preserve stability and GDP growth next year while demonstrating that we can at least begin lifting the capital controls without compromising stability and confidence, our chances for a higher credit rating should improve markedly. Thank you. 1 4 For further information, see: the Governor’s comments at a panel discussion held at a BIS symposium entitled A world without risk-free assets? Bank for International Settlements, Basel, 8–9 January 2013. See: here. BIS central bankers’ speeches | 6 By many measures, the global banking system is more resilient. For example, compared to earlier this decade, Common Equity Tier 1 risk-weighted assets of internationally active banks stand at around 13%, from about 7% before. Their leverage ratios average about 6% now, from less than 2% previously. Implementation of post-crisis regulatory reforms 7 We should also remember that the global banking regulatory standards are minimum requirements. National supervisors can use other levers of the Basel framework to apply higher standards or additional requirements on their banks, as appropriate, based on idiosyncratic considerations. 8 There is a general consensus that the financial system is safer than before. But the followon question can be: safer, yes – but is the system safe enough? 9 To say that regulators have addressed all that can go wrong would be great hubris. Indeed, this will be contrary to the evolving and adaptive nature of financial activity. The reality is a recurrence of financial crises in economic history. I would add that no amount of regulations and supervision can prevent crises; what regulators seek to do is to reduce the likelihood and negative impact from one. This will require banking regulators to remain vigilant against emerging risks, and hence the importance of forward-looking supervision to complement regulations. 10 On the other hand, with the last global financial crisis becoming a distant shadow of sorts, there are already calls that “this time it is different” and to dial down the enhanced regulatory requirements – just as all the crises before it. | 0 |
The authorities may instead extend excessive financial support to the problem bank through the central bank for instance in the form of exceptional liquidity assistance which is sometimes abused to cover solvency problems, or through the fiscal budget. Occasionally, even failing banks’ owners have received public financial support to continue the operations of the defunct bank. The overwhelming evidence from experiences in different countries and situations is that letting problem banks continue to operate without taking adequate action simply means that the problems will increase over time and they may in the end result in a systemic and very expensive crisis. To sum up on the preconditions, these must be taken seriously into account when you modernise your banking system. Where there are shortcomings you must deal with these in the appropriate ways, such as through legislation. While waiting for the preconditions to improve, the authorities and the banks must compensate for the shortcomings. Let me stress this again: Your banks, as well as other financial institutions, cannot operate efficiently and soundly in an environment where the necessary preconditions are inadequate. 4 BIS Review 104/2006 Regulation Banks perform special and unique services to society, such as accepting deposits and transforming them to credits, and for providing payment services. The combination of receiving short-term deposits and extending long-term loans makes banks inherently unstable. For this they may receive some protection by the public, such as the possibility of liquidity support and depositor guarantees. | In line with my earlier views on a flexible financial system my opinion is that such structures should be allowed, provided of course that your laws and regulations allow for effective consolidated supervision of the whole financial conglomerate. The present development toward a blurring of the boundaries between the activities of different financial institutions makes it reasonable to allow financial conglomerates. Broad groups conducting different activities may also be better able to diversify their risks and could thus be more resilient against financial shocks. Are there reasons for retaining state-owned banks? An argument sometimes voiced is that they promote competition and provide services for certain parts of the population which are of little commercial interest to the other banks. The Basel Committee’s core principles accept state-owned banks as long as they are run and regulated on equal terms with other banks. But my own view is that you should avoid having state-owned banks. Simply put: The government is not a good owner and manager of banks since the bank will come “too close to the politicians”. There is always a temptation for the government and parliament to use state-owned banks to provide what mistakenly looks like cheap services to the people. But there will be hidden costs for such services, not least in the form of disrupting competition in the banking sector. The government could certainly provide certain subsidized services if it so wishes, but the costs should be transparent. | 1 |
(c) The dotted black line is a suggested trigger level for contingent capital calibrated by minimising a loss function which takes into account both Type I and Type II errors. Type I error is the probability that conversion occurs despite capital not being required. Type II error is the event that conversion does not occur despite capital being required. The loss function places greater weight on Type II errors. Note that the loss function takes into account the full range of banks, not just the average score for each set. (d) 30-day moving average of market capitalisation. 24 BIS central bankers’ speeches Table 1: Estimated subsidy for UK and global banks $ Contingent claims / Kou(a) Ratings(b) 2007 2008 2009 2010 2007– 2010 average 2007 2008 2009 2010 2007– 2010 average UK 134 354 622 250 340 9 51 178 58 74 Global 496 1,308 2,294 924 1,256 33 211 528 197 242 a) Calculated using an extension to the Merton (1977) model developed by Kou (2002). It models changes in banks’ assets as being normally distributed with upward and downward “jumps” designed to reflect the possibility of extreme movements in asset values, and “fatten the tails” of the resulting distribution. This model is fitted to the prices of options written on the four largest UK banks’ equities. | There are now signs that may indicate that the turbulence in the financial markets has declined somewhat. The Federal Reserve’s actions to save the US investment bank Bear Stearns appear to have contributed to restoring confidence among investors. Some signs of this are that both access to capital and investors’ willingness to take risk have increased. The CDS premiums, which reflect the market’s valuation of credit risk, have fallen since the end of March. The so-called TED spread (the difference between the three-month interbank rate and the corresponding treasury bill rate) has fallen in the United States and is currently at around the same level as in the euro area. However, the Swedish TED spreads have not fallen back recently, and they are slightly higher than, for instance, the corresponding spreads in the euro area. This is partly linked to the short-term Swedish government rates not having risen as much as the US rates, for example, which is probably due to a reduced supply of treasury bills. In other words, this spread cannot be regarded as a sign that the market has changed its view of the risks in the Swedish bank sector. As always, the Riksbank is closely following this development and has not seen any reasons to take extraordinary measures. The Swedish banks have no problems with funding. However, there is still considerable uncertainty in the financial market, and there is a risk of setbacks. | 0 |
In addition, China plans to launch its international payment system, known as CIPS, in 2014. The development of a single centralised cross-border RMB payments infrastructure also augurs well for market efficiency and standardised practices for RMB payments across the region. 3 4 CNBC, 17 Jan 2013. “China’s outbound investment leaps to record high in December”. BIS central bankers’ speeches Singapore’s role as an offshore RMB market 32. As an international trading and financial centre, Singapore will seek to support the growth of a resilient offshore RMB market in the Asian region by: i. Building RMB liquidity; ii. Enhancing access to RMB for funding and investment purposes; and iii. Integrating the offshore RMB with existing Asian local currency markets. 33. Firstly, Singapore can leverage on its strengths as a key wholesale funding centre to increase liquidity and circulation of the RMB in Asia. We are already seeing good growth in RMB deposits, both non-bank and interbank. We are also one of the largest centres for RMB payments outside Hong Kong. As a major regional funding centre, Singapore has traditionally supported the liquidity of the Asian markets and can partner China in promoting sustainable offshore use of the RMB. 34. In February this year, ICBC Singapore was appointed by the People’s Bank of China (PBC) as the RMB clearing bank in Singapore. The RMB clearing bank will be an important channel for RMB liquidity to circulate between China to Singapore. 35. | The financial industry in Singapore has good expertise in developing FX and derivatives instruments, with several emerging Asian FX teams based here. It is well equipped to develop customised offshore RMB capital market instruments, especially for Asian market participants. For instance, banks in Singapore can explore how to encourage offshore RMB bond issuance in Singapore with longer maturity tenors and different issuer profiles. Conclusion 40. Let me wrap up briefly. Global deleveraging is being accompanied by the continued inflow of funds into Asia’s emerging market economies. This shift poses risks if not wellmanaged, but it is also an opportunity. The next phase of development in Asia’s financial markets is therefore critical. We have to develop greater breadth and breadth in Asian markets, so that savings flows translate into sustainable economic growth rather than recurrent bubbles in asset markets. 41. Thank you and I wish you a successful conference. BIS central bankers’ speeches 5 | 1 |
This includes properly designed incentive structures that must reflect risk outcomes. Financial institutions are also required to regularly review their risk management methodologies and processes to account for the changing business environment. This aims to ensure that risk management does not become something one does to check off a box on a list and then forgets about. A second notable observation has been the broader focus of risk management. While financial risks remain a key focus of risk management practices, risks from reputational, human capital and environmental concerns can have equally significant repercussions for a firm’s business. Recovering from reputational damage is a hugely expensive endeavour, takes a long time, and success is often not assured. We have observed in our own work that where institutions take a broader view of risk management in these areas, conversations around the role of risk management at the senior management and board levels are more likely to shift beyond avoiding losses, to enhancing strategic opportunities for improving the institution’s competitive position. This itself can have a mutually reinforcing effect of directing more resources towards risk management and creating better synergies between business and risk functions. While more firms are acknowledging the importance of reputational, human capital and environmental risks, actions however have generally not measured up. Many companies still have weak succession plans in place and remain vulnerable to key-man risks. | Indeed, an important development emerging in the recent period has been the more explicit consideration of implications for recovery plans in key strategic decisions, such as decisions to hub operations at a particular location or service provider. As much as organisational resources are put into enhancements of business continuity management, it is important for businesses to always keep in mind the inherent limitations of BIS central bankers’ speeches 3 business continuity plans and not be lulled into a false sense of confidence that these plans may provide. Scenarios featured in these plans are often based on assumptions, which are a simplification of reality at best. Such scenarios should always be rigorously challenged to account for changing conditions. Business recovery or resumption actions should also contemplate a range of conditions to build agility within the organisation to execute required, but potentially untested, responses. Firms should expect that they will rarely get to a point of precision in their scenario planning and BCM responses. This does not mean that BCM is necessarily reduced to an exercise in futility. A commitment to continuous improvements in BCM is almost certainly likely to prepare firms better for disasters and tail risk events even if those specific events were not exactly contemplated. This is because the organisation will be naturally better at coming together in a crisis, and would be able to leverage on some of the core elements of response plans that have already been developed and tested. | 1 |
Consider for a moment a very simple financial intermediary (a “bank”) that can finance risky lending with either debt, which here encompasses both deposits and credit market instruments, or equity. Assume that the bank pays RD on its debt and earns (a stochastic) RL on its loans, net of intermediation and monitoring costs. Then the return on its capital, RK, is given by: RK = (1+λ)RL – λRD, where λ is the leverage (debt-to-equity) ratio. In the normal course of events, one would expect the return on debt to be an increasing function of leverage, as the greater the leverage, the greater the chance that the bank’s capital will be wiped out in the event of low returns on the loans and they will be forced to default on part or all of the debt. Indeed, with symmetric information between bank and creditor, there should be no gain from raising leverage at all by virtue of the Modigliani-Miller theorem. For a number of reasons, however, this may not work in practice. Creditors – especially if they are households rather than sophisticated financial market participants – may not even factor in the implications of higher leverage for the possibility of default. And even if they do, the debt may be partially or wholly underwritten by the state, with the cost of the insurance only imperfectly passed back to the bank. | As a consequence the prices are apt to drop sharply with changing perceptions of the underlying default rates, a feature that has been apparent during the crisis. A typical CDO comprises a large number and variety of RMBS, including a mix of prime and sub-prime mortgages from a variety of originators. On the face of it, this might seem like a good thing as it creates diversification. However, even more than with plain vanilla RMBS, it becomes impossible to monitor the evolution of the underlying risks – it is akin to trying to unpick the ingredients of a sausage. That may not matter too much when defaults are low and only the holders of the first, equity, tranche suffer any losses. Holders of the safer tranches can in that case sit back and relax – a case of rational inattention. But once defaults begin to rise materially, it matters a lot what such a security contains. And with highly nonlinear payoffs, returns can be extremely sensitive to small changes in underlying conditions. When defaults on some US sub-prime mortgages originated in 2006 and 2007 started turning out much higher than expected, there was a realisation that losses could be much greater on some of these securities than previously believed. And a growing realisation of the informational complexity of these securities made them difficult to price in an objective sense. | 1 |
Even if the non-bank players do not need to directly engage with these issues, they must have high degree of awareness in order to work effectively with their partner financial institutions. Measures taken in Malaysia to develop a more inclusive financial sector Allow me to now share Malaysia's experience in addressing financial inclusion and branchless banking. In Malaysia financial inclusion has been a high priority in our national agenda for many decades. Since the establishment of the Central Bank, there has been a conscious policy to have an extensive commercial banking branch network across the country, to ensure the outreach, in particular, to cover the non-urban areas. Malaysia now has 10.2 branches for every 100,000 individuals as opposed to the global median of 8.4 branches for every 100,000 individuals. In Malaysia, more than 80% of the population also have some form of savings account. This has also contributed to the financialisation of savings in the country. Deposits as a percentage of gross domestic product is 180%. This means that savings is mobilised even from small savers into the formal financial system. This allows the savings to be channelled to productive economic activity. To further drive the provision of basic financial services to the underserved, the National Savings Bank in Malaysia has been mandated in 2006 to enhance the outreach of deposit services and micro-financing. Their efforts, together with those of commercial banking institutions and government mandated micro-financing agencies, have resulted in a significant expansion of micro-financing. | With this regard, the Data Management Group would act as the owner of the project. In addition, as the project itself is very crucial, which could create some wide impacts throughout the organization, the Bank of Thailand realizes its significance and hence assigning a group of high-ranking officials in forms of the Steering Committee to closely monitor the progress along the way. The committee panel is led by the Assistant Governor, Information System while I also serve as the project sponsor to ensure that the data management system project could well progress in accordance with the pre-scheduled plan. As for the roles of financial institutions which are major providers for a good deal of financial data in the system, most institutions have to bear high burden, both human labor resources as well as other expenses for data submission under the current system. With the implementation of the new system, most institutions unanimously provide great cooperation - to create comprehensive data transmission network that could accommodate all data transfer demands in time. Today’s opening ceremony presents the first phase of the financial institution electronic data submission project. From today onwards, financial institutions’ submission of over 200 hard copy and CRF reports would be substituted by merely 41 data sets. Consequently, this would more or less lessen the burden and make it more convenient for financial institutions to report data to the Bank of Thailand. | 0 |
Within the framework of the Treaty establishing the European Community (EC Treaty), the Governing Council shall be held accountable for the maintenance of price stability in accordance with its published definition. The Governing Council is neither responsible for the content of these projections, nor should its performance be judged against them. While macroeconomic projections are a useful instrument for undertaking the forward-looking assessment on which monetary policy decisions are based, the limitations I have outlined imply that such projections cannot be the only tool used by the Governing Council. The Governing Council should no more assume responsibility for the staff macroeconomic projections than it does for the content of other analyses that constitute inputs into its policy decisions, such as the monetary analysis under the first pillar or the evaluation of developments in individual indicator variables or financial prices and yields. Assuming responsibility for one input into its decisions would detract from the Governing Council’s true responsibilities, first for monetary policy decisions and ultimately for the maintenance of price stability. Given the Governing Council’s overriding commitment to the maintenance of price stability, the only forecast for which it could take responsibility would be one that was consistent with price stability. BIS Review 109/2000 4 Such a forecast - which, by its nature, would not change over time - would not, in itself, be very informative about the Governing Council’s assessment of the prevailing economic situation. | That takes us to a third potential explanation for the downward trend in risk weights, one familiar from every other field of self-regulation – the system has been gamed or arbitraged (Blum (2008), Masera (2012)). Under a self-assessed standard, banks may have both the incentive and the ability to shade downwards risk weights, or to switch to lower risk-weighted asset categories, thereby boosting reported capital ratios. The aggregate evidence is consistent with this having occurred secularly and on a significant scale. Firm-specific evidence is also consistent with this hypothesis. A survey by McKinsey in 2012 found that 65% of firms were engaged in “RWA optimisation” of some form (Babel et al (2012)). And the recent US Senate investigation of the J P Morgan “whale” incident is the latest in a long line of identified misdemeanours sourced in model manipulation. In short, while one of the original aims of the Basel Accord was to prevent a race to the bottom, the move to risk-based capital adequacy standards may in fact have accelerated it. What, then, of the second objective of the original Basel Accord - levelling the international playing field? From an economic perspective, a level playing field would imply that banks with equivalent portfolios should hold a broadly equivalent amount of capital. The most compelling test of this hypothesis comes from the hypothetical portfolio exercises (HPE) recently conducted in the UK and internationally. These take a set of common portfolios and ask how much capital banks’ internal models would set against them. | 0 |
Recognizing that inflation targeting is not a panacea, the Monetary Policy Committee has supplemented the framework with a regular monitoring and assessment of seven key areas of financial imbalances, where buildup may threaten the macroeconomy and price stability. These seven areas are the country’s external position, the real estate sector, bank credit, household and corporate financial positions, the financial market, and the fiscal position of the Government. Ladies and Gentlemen, despite all these reform efforts and the stronger foundation the Thai economy now has, we have to remain vigilant. Today, the change of pace in the global economic environment is simply unprecedented. Some of these changes, if left unchecked, may have significant implications on a country. While the new global dynamics represents an opportunity for a country like Thailand to leap forward, it also entails increasing risk of economic instability. The evolving complexity of the global economy means that conventional thinking and approaches to deal with economic problems may, at times, need to be adapted. The 1997 crisis highlighted this point. Back then, the conventional wisdom for a crisis-ridden country is to adopt restrictive monetary and fiscal policies. As we all now know, overtightened stance aggravated the already fragile situation and created many unnecessary pains. Only when the crisis contagion spread to several countries was it evident that such measure was a wrong medicine for Asia, which ultimately led to the abandonment of some of these measures. Today we are faced with the major problems of global imbalances and large and volatile capital flows. | Nevertheless, the past two years have witnessed a squeeze in firms’ gross profit margin as a result of increased competition and the appreciation of the baht relative to other regional currencies. BIS Review 46/2007 3 And as for the banking sector, which was at the center of the crisis, painful financial restructuring has now bore fruits. The banking sector has gained strength, with stronger profitability. The level of nonperforming loans has been cut down by four-fifth from its peak in 1998 to about eight percent in Q3 2006. And with the BIS ratio of nearly 15%, the banking system appears well cushioned to unexpected shocks. Finally, the fiscal sector benefits greatly from the economic upturn. Increasing corporate profits and consumption spending have resulted in higher tax revenues, allowing the government to strengthen its fiscal position significantly. Public debt to GDP has declined and is currently at only 41% of GDP. Ladies and gentlemen, I hope my account of these selected developments has shown you how far the Thai economy has come since 1997. The improvement was not due to luck or natural recovery process. It took a concerted effort by both the public and the private sectors to enable this turnaround. A natural question that follows then is whether this renewed dynamism will be sustained and this leads to my second point. 4 BIS Review 46/2007 That is, despite important challenges both domestically and externally, the medium-term outlook of the Thai economy remains positive. | 1 |
Michael C Bonello: Single currency issues – a central bank perspective Speech by Mr Michael C Bonello, Governor of the Central Bank of Malta, at the conference “The Euro - the impact on business”, organised by the Malta Federation of Industry, 16 January 2003. * * * By way of introduction, it is important to stress that Economic and Monetary Union (EMU) and the euro are key aspects of the Treaty on European Union. They are a logical consequence of the process of European integration, and in particular of the economic rationale of increased trade as the driving force for the further integration of citizens, institutions and markets. Indeed, the arguments for more closely integrated markets, namely that greater trade and financial integration will increase economic efficiency and improve welfare, can equally be made for a single currency. In the case of the EU, the advantages of a single market postulated by economic theory appear to have been amply realised. Since internal borders were removed ten years ago, it is estimated that the Single Market has helped to create 2.5 million extra jobs; the EU’s combined GDP in 2002 was 1.8%, or euro 164.5 billion, higher than it would have been; and each household was on average 5,700 euro 1 better off. Market opening is, therefore, not only good economics but also very good social policy. Further benefits can be expected to flow from the introduction of the single currency. | We also hope that you will also have the opportunity to experience Malaysia during your time here. On that note, I thank you for your attention. BIS central bankers’ speeches 3 | 0 |
In terms of competitiveness, progress since 2008 has been most significant. On Banco de España estimates, we will by early 2014 have regained, relative to the average of the euro area countries, all the competitiveness forgone from 2000 to 2008. These gains in competitiveness have been underpinned, above all, by the moderation of wage costs, a trend to which the labour market reform approved in early 2012 has proven conducive in respect of collective bargaining. Along the same lines, inflation has been very contained since 2009, and this has naturally contributed to the recovery in competitiveness. The export sector has shown great capacity and has notably increased its presence and sales both in the euro area and in other markets. Suffice it to say that this year, from January to August, the trade surplus, excluding energy, was almost double that of 2012, climbing from € billion to € billion. These developments have been upheld by corporate restructuring that has enabled the average value exported per company and the export base to increase. The sustained increase in the number of exporting companies over the past five years is due mainly to the growing participation of SMEs. Our trade balance with all regions has improved, with the exception of the oil-exporting countries. Spain is running a surplus both with the euro area and with the rest of the European Union. | Further, like the Federal Reserve and the Bank of England, it has pursued a very expansionary liquidity-provision policy, which can be measured by the sizeable increase of over 50% in its balance sheet since 2008. Among the extraordinary measures, I would highlight the long-term (as long as three years) refinancing operations; the extension of the list of assets accepted as collateral for the loans made to banks; and the launch of asset purchase programmes, such as the Securities Market Programme, the two Covered Bonds Purchase Programmes (including Spain's) and the announcement, in August 2012, of the Outright Monetary Transactions programme. More recently, in July this year, a policy of forward guidance has been adopted, involving the more accurate communication of the projected behaviour of official interest rates in the future. Yet we should remember that the capacity of monetary policy to resolve the problems at the root of this crisis is very limited. What it can do, and is doing, is making time so that other players who do have the proper tools to resolve the problems can adopt the measures needed, and so that such measures may take effect. The other European economic authorities, starting with the Commission, have – in close collaboration with national governments – taken significant steps towards correcting the weaknesses exposed in the euro's institutional arrangements. Thus, a permanent mechanism, the European Stability Mechanism, has been set up, with the capacity to provide funds to the Member States deprived of access to the capital markets. | 1 |
Important issues on the political agenda in the future will be how the Nordic welfare model should be renewed to make it both economically and socially sustainable. Will we once again be able to serve as a model for other countries during the change that the whole of Europe now faces? Regardless of the chosen model, our demographic situation will require measures that result in a higher average number of hours worked, a larger number of workers e.g. pensioners, and an increase in immigration. This assumes that we want to keep or enhance our welfare system. 1 4 Swedish Association of Local Authorities, "Aktuellt om äldreomsorgen" (Current trends in geriatric care), October 2003. BIS Review 46/2003 Productivity growth can help When the long-term growth rate receives little or no contribution from the labour supply, dependency on labour productivity increases. Compared with other countries, Sweden has thus far performed well in terms of productivity growth. During the 1990s productivity has risen by 2 per cent per year or slightly more. This is a clear improvement on the 1980s when productivity growth was around 1 per cent per year, and even more so compared with the 1970s when the trend was actually negative. So it is productivity rather than the labour supply that has fuelled growth in recent years. This also applies to the other Nordic countries, al-though the labour supply has made a bigger contribution than in Sweden. The particularly steep rise in labour productivity during the 1990s was due to several factors. | One important factor was that many low-productivity firms went bankrupt in connection with the sharp economic slowdown at the beginning of the 1990s, while other firms implemented cutbacks of lowskilled labour that had less qualified tasks. When the economy began to grow again there was plenty of unemployed labour, and it was possible to attain high growth without inflation gathering pace. Another cause was the IT boom towards the end of the 1990s, which also contributed to productivity growth. In the years ahead, we can also expect to have good productivity growth in Sweden. Increases in productivity growth can be a solution for large parts of the corporate sector, but this is less often the case for parts of the public sector. Quality care and education often require a strong presence of human labour. Nevertheless, there is probably much to be gained by organising and financing the public sector in new ways. The contribution made by trade union organisations in this regard could prove to be a decisive success factor. Here, the Nordic countries have an advantage over others through a high degree of organisation and an established cooperation between employers and employees. The education sector also faces considerable challenges. When the current generation of teachers in Sweden retire, a substantial increase in new teachers will be needed. According to the National Labour Market Board, the number of new recruitments required to replace retired teachers is forecast to come to around 100,000 up to and including 2015. | 1 |
Chile) 1.8 1.4 -0.6 9.3 7.9 4.2 4.5 2.3 -0.5 1.9 7.7 5.6 3.5 2.8 2.2 -0.6 2.0 7.8 4.9 3.8 2.8 1.9 -0.3 0.5 8.0 6.6 4.3 3.3 1.9 -0.4 1.1 8.1 6.3 4.3 3.3 2.3 1.2 0.9 8.2 6.4 4.7 3.7 2.5 1.3 1.3 8.2 6.4 4.7 3.7 LME copper price $ Brent oil price $ 400 111 361 112 361 112 (levels) 340 350 105 108 350 100 340 101 Terms of trade -0.6 -5.0 -4.1 1.3 -1,6 (annual change, percent) -0,8 -0.4 (e) Estimate. (f) Forecast. Sources: Central Bank of Chile based on a sample of investment banks, Consensus Forecasts, IMF and statistics bureaus of respective countries. | The copper price trend is forecast to slope downward, because of a larger response of supply than in previous years, but it is revised up in 2013, incorporating actual first-quarter figures. Thus, the baseline scenario assumes that the terms of trade will be slightly higher than foreseen last December (table 1). In the baseline scenario, GDP growth will be in the 4.5%–5.5% range in 2013, exceeding December projections. The revision is partly explained by stronger growth foreseen in the mining industry, as revealed by incoming indicators. It also considers that the external impulse the Chilean economy will be receiving from abroad will be somewhat stronger, in line with upward revisions to growth of our trading partners and terms of trade. Domestic demand growth, because of both its dynamism of the end of 2012 and partial indicators of early 2013, is also corrected upward, to 6.1% (5.7% in December). Annual growth in investment and consumption is up from earlier projections, bringing the current account deficit to 4.4% of GDP in 2013, compared with 4.6% forecast in December. In any case, the path of domestic demand and investment assumes variation rates declining in the coming quarters (table 2). Y-o-y inflation will remain low in the short term, still affected by the specific factors that have influenced recent indicators. As they dissipate, CPI inflation will start to rise, reaching 2% by mid-year. | 1 |
If a non-European country wanted to help Europe, there is the question of whether it should send the money to the IMF or use it to purchase EFSF bonds, a senior tranche of the SPV, or the peripheral countries’ debt, i.e. with no intermediation. The many uncertainties associated with the specific operation of the EFSF are giving rise to general doubts about the appropriateness of the current approaches to overcoming the ongoing debt crisis in the euro area. I cannot help feeling that many solutions to the problems have been wrongly chosen in part because the main causes of the financial and debt crisis have not been correctly identified. Greece gets too much attention from decision- and policy-makers. It represents a mere 1/50 of the European economy. I believe that without the political will to provide Greece with massive support from European funds to restore its competitiveness – and I see little such will at the moment – its exit from the euro area will be inevitable, since depreciation of the Greek currency will become part of the measures to restore competitiveness. The provision of loans to Greece has so far primarily bought time. This has enabled wealthier Greeks to transfer their savings out of the country. The costs of such action have been a reduction in Europe’s credibility and harm to the reputation of the International Monetary Fund and its ability to raise funds outside Europe. | To fund these purchases, private capital will be needed (e.g. in the form of senior tranches of SPV debt). Therefore, this project lacks the firm official commitment which similar central bank (BoE, Fed) programmes not reliant on private investor participation have. 5. The latest uncertainty is the adjustment of the entire EFSF project to the loss of France’s (and Austria’s) AAA rating from S&P, followed by the downgrading of the EFSF’s own rating from AAA to AA+. In its comments on this change, S&P stated explicitly that the EFSF’s rating has a developing outlook, which means that the agency foresees the possibility both of returning the rating to AAA (if offsetting credit enhancements are adopted) and of downgrading it further to below AA+ (if key guarantor countries are downgraded). A lower EFSF rating would probably be associated with higher interest costs of refinancing. There might even be a fall in liquidity in the EFSF bond market owing to the exit of some institutional investors, who primarily target the AAA segment of issuers. 6. On a more general level, the lack of coordination of resources for supporting European countries is disturbing. It is resulting in fragmentation of resources and a lack of transparency in the setting of parameters such as “who”, “how much”, “to whom” and “how”. Specifically, the European Union, or the euro area, is planning simultaneously to lend to the International Monetary Fund, to guarantee the EFSF and to guarantee the ESM, while central banks guarantee the capital of the ECB. | 1 |
Significant progress was achieved in the area of Islamic money and capital market where the volume traded in the Islamic money market reached RM340 billion, while the outstanding amount of Islamic private securities was amounted to RM75 billion or 44 percent of the total outstanding private securities. In the stock market, more than 80 percent of the counters in the Kuala Lumpur Stock Exchange are Shariah-permissible counters. This year the Islamic banking sector will be liberalised to include up to three foreign Islamic banking institutions as the system becomes more integrated with the global financial system. V. Positioning the Central Bank to meet the challenges ahead My remarks on pre-requisites to a stable and comprehensive financial system would not be complete without a few words on the role of the central bank. To stay at the forefront in dealing with the new challenges and to effectively perform our responsibilities, the Central Bank’s efforts have also been focused on strengthening its capacities and capabilities. Central Banks in emerging market economies have a much broader mandate than our counterparts in the more advanced and mature economies. Of importance, is our developmental role in charting the development of the financial system, institutional development and the overall economic management. This is over and above the objectives of achieving monetary and financial stability and ensuring the sound and efficient functioning of the payments system. The Central Bank also has the important role of developing the financial infrastructure, developing the financial markets, the legal framework and driving the institutional development. | Pre-requisites to a stable Islamic financial system Despite a more challenging environment, the development of Islamic finance as a viable form of financial intermediation has moved forward. It is while Islamic finance is still at its early stage of development that the opportunity has been taken to strengthen its foundations and put in place the pre-requisites that will pave the way for its development and safeguard the stability of the system. Not only has closer attention been given to the supervisory, regulatory and legal dimension but also to the development of the financial infrastructure and the markets as well to institutional development. In essence, the prudential regulatory design has been complemented by concurrent efforts to develop Islamic financial markets, the Islamic institutions and the financial instruments. Allow me to highlight the key areas that are important to this objective. First, effective regulatory and supervisory framework The hallmark of a well-developed financial infrastructure is an effective legal, regulatory and supervisory framework which would underpin the stability of the financial system. The regulatory and supervisory function is an indispensable and vital component of the financial infrastructure. For the Islamic financial system, this framework also needs to be consistent with the requirements of the Shariah principles, including the establishment of a Shariah council, which provide assurance that the strategic direction, the formulation of policies and the conduct of financial transactions are in compliance with the Shariah principles. | 1 |
These are some of our unique strengths, and it is not easy for others to replicate them, at least in the short term. With all these developments, where should we go next? At the policy level, I believe it would be important to build an effective two-way channel to increase interaction between the RMB onshore and offshore markets. A potential area that can be explored is to promote the use of RMB for conducting crossborder real economic activities such as FDI and ODI. Given the significant share of Hong Kong in Mainland’s FDI and ODI, building such a two-way channel will also be conducive to the sustainable development of the offshore RMB market in Hong Kong. On this, I am glad to see that the People’s Bank of China has, as I briefly mentioned a few minutes ago, recently launched a pilot scheme, under which ODIs by Mainland Chinese enterprises are allowed to be settled in RMB upon approval of relevant Mainland authorities. As for FDI in RMB, there have already been some pilot cases (such as McDonald’s) and it is hoped that the relevant arrangement can be formalised in due course. Apart from FDI and ODI, we have been in close communication with the Mainland authorities to explore other possible channels. In particular, we welcome the announcement of the People’s Bank of China in August last year regarding the introduction of a pilot scheme allowing eligible entities in Hong Kong to make use of their RMB funds to invest in the Mainland’s interbank bond market. | Global investors’ allocations to the region have been rising, alongside Asia’s increasing weight in global indices. The region has become a favourite hunting ground for investors, in search of the next unicorns. Households and institutions in the region have themselves become ample sources of wealth looking for investment opportunities. These pools of capital can be mobilised through our capital markets, to finance the region’s high-growth enterprises. Asia has an abundance of channels through which companies and capital can meet. There are established bourses as well as newer, tech-focused exchanges. There is also a growing number of blockchain-enabled platforms. Example: DBS Bank has launched the DBS Digital Exchange for the tokenisation, trading and custody of digital assets. Singapore’s Value Proposition Singapore is well poised to become one of the leading fund-raising centres in Asia. There are four key dimensions to Singapore’s value proposition: a vibrant ecosystem for private equity and venture capital; the premier Asian hub for solutions in investment risk management; a rapidly growing debt capital market; anda promising equity capital market. First, a vibrant private equity and venture capital ecosystem. The thriving start-up and 1/4 BIS central bankers' speeches Fintech scene in Singapore and Southeast Asia have drawn active interest from PE/VC players from around the world. PE/VC assets under management in Singapore have doubled over the last five years. They grew by over 50% last year despite the COVID-19 pandemic and recession, testament to the resilience of the ecosystem. Technology and innovation are making private equity and venture capital investments more accessible. | 0 |
So, a drop in house prices probably would lead to a gradual cutback in spending, giving the Fed time to respond by lowering short-term interest rates and keeping the economy steady. Now let’s complicate things. Suppose house prices started falling because bond and mortgage interest rates started rising as the conundrum was resolved, say, because the risk premium in bonds rose due to concerns about federal budget deficits or other factors. Then we’d have the cutback in spending because of the wealth effect, plus there’d likely be further spending cutbacks, as borrowing costs for households rose. Furthermore, a rise in long-term rates would have effects beyond just households—it also would dampen business investment in capital goods through a higher cost of capital. How manageable would this scenario be? Like the wealth effect, these added interest-rate effects operate with a lag, so, again, there probably would be time for monetary policy to respond by lowering short-term interest rates. This obviously would not be a “slam dunk,” but in many circumstances it would seem manageable. A matter of more concern is whether this scenario would lead to financial disruptions that could cause spending to slow sharply and quickly. One issue that receives a lot of attention is the increasing use of potentially riskier types of loans, like variable rate and interest-only loans that may make borrowers and lenders vulnerable to a fall in house prices or increase in interest rates. | In this case, the “what if” question might be, “What’s the likely effect if national house prices did fall by 25 percent, enough to bring the price-to-rent ratio back to its historical average?” Before going any further, I want to emphasize that I’m not making any predictions about house price movements, but instead, simply discussing how a prudent monetary policymaker could assess the risk. First, there would be an effect on consumers’ wealth. With housing wealth nearing $ trillion today, such a drop in house prices would extinguish about $ trillion of household wealth—equal to about 38 percent of GDP. Standard estimates suggest that for each dollar of wealth lost, households tend to cut back on spending by around 3½ cents. This amounts to a decrease in consumer spending of about 1¼ percent of GDP. To get some perspective on how big the effect would be, it’s worth comparing it with the stock market decline that began in early 2000. In that episode, the extinction of wealth was much greater—stock market wealth fell by $ trillion from March 2000 to the end of 2002. This suggests that if house prices were to drop by 25 percent, the impact on the economy might be about half what it was when the stock market turned down a few years ago. Moreover, the spending pullback wouldn’t happen all of a sudden. Wealth effects—positive or negative—tend to affect spending with fairly long lags. | 1 |
Private projections are consistent with this scenario of lower inflation throughout the projection horizon (figure 8). This projection is based on the assumption that, on average, output gaps will be closed throughout the projection horizon, and that the propagation of specific price shocks will continue to match the historic average, as it has in recent months. As for monetary policy, forecasts use as a working assumption that the monetary policy rate will follow a path comparable to the one that can be inferred from several expectation indicators (figure 9). As usual, there are risks that may cause the macroeconomic scenario described here to deviate from projections. On this occasion, the Board estimates that the risk balance for inflation and output is unbiased. Although milder than in March, one important risk is the persistence and propagation of the specific price shocks of the past few quarters. While fairly stable commodity prices are assumed for external markets, a scenario of higher prices significantly affecting local inflation because of the current status of output gaps cannot be ruled out. The labor market is showing important strength, with the rate of unemployment in low levels by historic standards and a substantial increase in employment, while various sources of information speak of the difficulties in hiring skilled labor in some regions and economic sectors. The y-o-y increase in wages is up from end-of 2010 (figure 10). However, the combination of increased employment, higher wages and stronger economic growth has allowed unit labor costs to vary in line with the inflation target. | 14 BIS central bankers’ speeches Figure 14 Gross capital inflows and outflows (1) (percentage of GDP) Chile (2) Emerging economies (3) 20 20 8 8 15 15 6 6 10 10 5 5 4 4 0 0 2 2 -5 -5 0 0 -10 -10 -2 -2 -15 -15 -4 -4 -20 -20 -6 -6 90 94 98 02 06 90 10 94 98 02 06 10 Gross portfolio inflows & debt Net flows Gross inflows Gross portfolio inflows and debt (1) Annual flows. (2) 2011 figures show annual flows accumulated up to first quarter. (3) Simple average of: Brazil, Colombia, Indonesia, Malaysia, Mexico, Peru, the Philippines, South Korea, Thailand and Turkey. 2010 figures show annual flows accumulated up to third quarter 2010. Sources: Central Bank of Chile and International Monetary Fund. Figure 15 Currency mismatches (1) (2) (percentage of total assets) 6 6 3 3 0 0 -3 -3 -6 -6 06.IV 07.II 07.IV 08.II Tradable 08.IV 09.II 09.IV Non tradable Total 10.II 10.IV (1) Liabilities in dollars minus assets in dollars, minus net derivatives position. | 1 |
This means that every person employed in the construction industry is providing a declining contribution to GDP, in relative terms. During most of the 1990s this difference increased, but it has recovered somewhat in recent years. This can perhaps be partly explained by the fact that there is still a large manual element that it is neither desirable nor possible to eliminate. At the same time, it is probable that the entire industry has a lower degree of rationalisation than other industries. This is also visible in the development of prices for both construction services and building materials, which is far above other industrial products, despite a relatively weak demand (OH 3 development of prices for building materials). There is BIS Review 32/2002 5 something unhealthy in an industry where wages and prices rise despite a relatively weak demand and lingering unemployment in the industry as a whole. Let me conclude by saying that a recover in the Swedish economy is under way and that the Swedish economy has a good foundation on which to build, with a surplus in both our public finances and in Sweden’s international trade. Inflation is hopefully on the way down. At the same time, wage formation and pricing behaviour in general comprise an element of uncertainty as economic activity begins to pick up. Personally, I consider that this indicates a possibility that further interest rate hikes will be necessary in future. | Although only 26% of the oil produced in Africa was used locally in 2003, energy consumption increased by 44% in Northern African countries (ADB and UNEP, 2003). However energy consumption of liquid fuels comes at a cost. The carbon dioxide (CO2) pollution as a result of energy consumption in Africa was approximately 3.5% of the global emission of CO2, (UNEP, 2003). Growth in demand in the fishing sector has ultimately resulted in the threat of the sustainability of particular coastal and marine populations. To-date the per capita fish catch worldwide has remained static since 1972, however, this measure for Southern Africa has declined significantly (UNEP 2003). Globalisation has resulted in the specialisation of economies in areas in which they have a comparative advantage. The prevalence of cheaper labour costs has led African countries to primarily move towards the role of producing goods in labour intensive sectors such as agriculture and mining. The demand for cash crop exports from African countries by the developed world has equally soared. However the use of pesticides in cash crop production in order to maintain certain international standards has the potential to reduce soil quality due to toxic residue build up. Future population growth, expansion in the agricultural sector, and general economic expansion in Africa will see heightened competition for water resources among these sectors. Competition for water resources between households, industry, and agriculture is expected to increase in future, as currently 25% of the population is living in areas already facing severe water stress (UNEP, 2003). | 0 |
It is not sustainable in the long term to have a wage development that entails the cost of labour increasing more than the value of the goods and services produced. This means that real wage costs can only increase at the same rate as productivity growth. The stronger the growth in productivity, the higher the wage costs can be without triggering inflation, as long as they take into account any reduction in working hours and other secondary wage costs. The basis for this reasoning is that the economy is in balance, which is characterised by, for instance, stable wage shares and profit shares. Profit shares - profits as a percentage of value added - have fluctuated around 30 per cent for the entire economy. Since 1995, real wage costs have risen more quickly than productivity growth and wage shares. This is not sustainable in the long run. It is necessary, in the long term, for wage shares and profit shares to be at a level where profitability in Sweden is on a par with our competitors to safeguard a level of capital formation and employment that will best promote the development of our welfare. 2 BIS Review 7/2003 A couple of different approaches/rules of thumb are used in the wage formation debate to evaluate the scope for wage increases in the long term, or to estimate a "wage cost norm". | This is no easy task in the present situation. The labour market is quite different today than it was 5-10 years ago. Unemployment is relatively low and there is a labour shortage in some parts of the economy, despite the slowdown in economic activity. Moreover, there are tendencies towards demands for compensation, which, if they were to spread, could provide further complications for wage formation. The trends with regard to labour supply are also worrying. Demographical developments, such as an increasing number of elderly people over the coming decade, will create a demand for more employees to work in geriatric care, for instance. At the same time, the number of persons available on the labour market is declining. An addition problem is the high frequency of absence due to sickness. It is evident that a central target for economic policy should be to get more people in work. This would facilitate wage formation and create greater scope for economic growth in future. This is perhaps just as important a theme for a hearing in the Committee on Finance as wage formation in itself. It concerns measures that are largely in the hands of the Riksdag. Thank you! | 1 |
The move to a single shared platform with TARGET2, which on 19 May 2008 fully replaced the former TARGET system, will render wholesale euro payments even more integrated and efficient. Bond and equity markets also show clear signs of integration, especially the government bond markets. Progress has also been achieved in the corporate bond markets and, to a lesser extent, in equity markets. Both bond yields and equity returns are increasingly driven by common factors and the cross-border shares of bond and equity holdings have been growing to 60% and one third of total holdings, respectively. This suggests that euro area investors are progressively diversifying their portfolios on a cross-border basis. At the same time, country-specific factors still play an important role, especially in corporate bond and 1 London Economics (2002), “Quantification of the macroeconomic impact of integration of EU financial markets”, Report to the European Commission. 2 See the Report on Financial Integration in Europe at http://www.ecb.europa.eu/pub/pdf/other/financialintegrationineurope200804en.pdf. 2 BIS Review 86/2008 equity markets. A key obstacle to greater bond and equity market integration is the lack of a sufficiently integrated infrastructure for securities clearing and settlement in the EU. Substantial progress has also been made on the integration of banking markets, namely in the wholesale and capital market-related segments. Cross-border interbank loans have increased to almost a quarter of total interbank loans and euro area banks’ holdings of securities issued by banks in other euro area countries have almost tripled over the past decade. | Il importe que le secteur public soutienne le processus d’intégration financière, notamment à travers l’amélioration de la structure réglementaire et de surveillance au sein de l’Union européenne, la levée des obstacles dans le domaine des systèmes de compensation et de règlement-livraison de titres et le renforcement du cadre réglementaire et de l’infrastructure de marché pour les services bancaires aux particuliers. L’Europe doit aussi s’impliquer fortement dans la sauvegarde de la résilience du système financier mondial, en voie d’intégration complète. La coopération mondiale face à la correction observée récemment sur les marchés de capitaux a été efficace jusqu’à présent, mais il ne faut céder à aucun excès de confiance. De nombreux défis sont en effet encore devant nous. La mise en œuvre en temps opportun et de façon cohérente des recommandations formulées par le Forum de la stabilité financière réclamera des efforts soutenus de la part de chacun d’entre nous, à la mesure de nos responsabilités. De même, un engagement constant en faveur d’une étroite coopération transfrontière demeurera essentiel, non seulement pour surmonter les turbulences actuelles mais, plus généralement, pour assurer une stabilité financière mondiale satisfaisante dans le contexte d’un système financier international de plus en plus intégré et complexe. Le renforcement de la transparence, l’atténuation de la procyclicité du système financier, une gestion efficace des risques de liquidité et la consolidation des dispositifs institutionnels de coopération entre les différentes autorités responsables constituent les grands axes des réformes nécessaires. Je vous remercie de votre attention. I thank you for your attention. BIS Review 86/2008 7 | 1 |
From a central banker’s standpoint, the role of asset prices in general and of inflation-indexed bonds in particular in the process of setting monetary policy is mainly related to their information content on future economic activity and inflation. As you have already probably noticed, the Governing Council of the ECB sometimes refers to the information delivered by the changes in the inflation-indexed bond yields both in its introductory statement and in its comprehensive assessment of recent economic and financial developments, as presented, for instance, in the ECB’s Monthly Bulletin. To elaborate further on this, I will develop three points. First, I will describe the information content of inflation-indexed bonds and explain why this information is relevant for central banks. Second, I will highlight some of the main drawbacks and potential biases that may alter this information content. Third, I will briefly review the other indicator variables that we also use in our cross-checking exercise at the euro area level. Finally, I will conclude my presentation by raising the issue of what I call the 1 Robert Shiller: “The Invention of Inflation - Indexed Bonds in Early America”, NBER Working Paper N°10183, December 2003. 2 In the year prior to the introduction of the indexed bond, the inflation rate was at 69.2% in Brazil, 22.2% in Chile, 19.7% in Colombia, 34.8% in Argentina, 16,1% in the UK in 1974 and still at 14% in 1980. | Challenges Maintaining macroeconomic stability is critical to sustaining economic growth in Zambia. The challenge is how to sustain stability and mitigate falling domestic demand within the constraints posed by increasingly scarcer external financial inflows. This has to be done in the context of implementing policies consistent with medium-term stability and development goals. The second challenge relates to mitigation of the vulnerability of the Zambian economy to the adverse external shocks. We will have to closely monitor capital flows and adopt supervisory policies that will ensure a sound and stable financial system. The pursuit of policies that promote macroeconomic stability is also important to ensure that the domestic economy remains attractive to both domestic and foreign investors for the long-term growth and development of the economy. One of the unfolding lessons of the current crisis is the need for greater transparency in the transactions players in the financial markets undertake, particularly, with respect to offbalance sheet transactions. We will therefore be acting to ensure that market players provide us with detailed information on their transactions. In addition, we will continue to work towards strengthening and developing our financial markets as well as encouraging competition and efficiency. Prospects for 2009 and beyond Your Excellencies, going forward, it remains important to accelerate diversification of the economy as a way to mitigate the effects of a prolonged global financial crisis. Currently, there are enormous business opportunities which still lie unexploited in Zambia in virtually all sectors of the economy. | 0 |
But this task can only be performed in cooperation with the Government and other constitutional institutions. Today we can acknowledge that regardless of the fact that both the central bank and other state institutions employ Estonians who are known as great individualists, our cooperation in the field of economic policy has been smooth and yielded results. • Five years ago I also spoke about the essential developments and necessary reforms facing Estonia. Today, many structural reforms under discussion at the time have been successfully launched, including the pension system reform, which has given a completely new dimension to the saving patterns of the Estonians. As regards the changes that the financial system was facing, my anniversary speech mentioned the plans to set up a universal financial supervisory body, which has also successfully materialised. Today we have a banking sector that is very up-to-date and successful on the international banking scene as well. • According to the World Economic Forum, Estonia is the most competitive country today among the new European Union member states with its competitiveness index of 4.64 points. With this score Estonia is also ahead of four ‘old’ member states (Spain - 4.47, Italy - 4.38, Portugal - 4.25, and Greece - 4.00), while narrowly falling behind Ireland (4.69). Our open market economy, development of the information society and the financial sector BIS Review 26/2004 1 as well as the quality of our business environment have been considered Estonia's strongest areas. | But in order to actually use such budgetary policy tools flexibly, the budget has to be balanced not in the course of just one year but across the whole economic cycle - posting a surplus in the periods of fast economic growth while showing not a very large deficit, a maximum of 3% of the GDP, in the period of downturn. There has been a notion spreading among Estonians that we are extremely good... Hence the biggest threat facing us is complacency. • Besides its significant role in the world trade, the European Union has long been a net investor in the rest of the world. But the level of investments within the European Union, at least in the old member states, remains lower than it could and should be. A well-considered investment policy is one of the key issues from the point of view of European economic development prospects. Creating an attractive investment environment and utilising the know-how accompanying the investments is an area where Estonia has (at least in the case of the financial sector) successful experience to offer to Europe. At the same time, Estonia as an EU member state should learn from the experiences of other states. • In 2004-2006 an average of 2.7 billion kroons per year is flowing into Estonia from the European Union. According to the present financial estimates, the inflowing amount will be around 40 billion kroons in 2007-2013, an average of 5.6 billion kroons a year. | 1 |
When faced with big decisions, there is a temptation for caution to prevail: do interest rates really need to be moved by that much? Why not wait and see before resorting to the use of unconventional instruments? And indeed the MPC has tended to move rates in relatively small, sequential steps in the past. But I would argue that this is because for much of the period since the MPC was established the outlook for inflation evolved relatively gradually. That all changed following the collapse of Lehman Brothers. Since the autumn of last year, we have experienced an unprecedented sequence of events that has caused a substantial re-assessment of the economic outlook and of the stance of policy necessary to keep inflation on track to meet the target. As the economy slowed sharply and inflation threatened to fall substantially below the BIS Review 86/2009 1 target, the Committee responded with unprecedented actions that were previously confined largely to the realms of theory. I believe that the operation of monetary policy during this period demonstrates the strength of the inflation targeting framework in action. The clear numerical target, combined with a framework of transparency and accountability, impose discipline on the MPC. They ensure that we take the decisions necessary to bring inflation back to target, however “courageous” those decisions might seem. | Indeed, the very knowledge that the Bank stands ready to purchase assets may be as beneficial as the actual purchases. And over a period of time, as market functioning improves, the quantity of private sector assets held by the Asset Purchase Facility may well decline as assets mature and are rolled over into the private market. This should be seen as a sign of success not of dwindling support. The Bank continues to review actively the case for extending its operations into other corporate credit markets, and recently announced its intention to extend its purchases to include commercial paper secured on loans for working capital. But given the relatively modest size of corporate credit markets in the UK, to increase significantly the scale of our corporate debt purchases would involve changing the nature of our operations. Rather than improve their functioning, large scale asset purchases would risk crowding out private debt markets: substituting for markets rather than supporting them. That is not consistent with the aims of the Asset Purchase Facility and could detract from the long-term efficiency of the economy. A second criticism that is sometimes made against the asset purchase programme is that some of the gilts we have purchased have been from foreign investors and this may limit the effectiveness of the purchases. This argument is based on the supposition that overseas investors may be more likely to reallocate their portfolios into foreign currency assets, rather than into alternative sterling assets, such as corporate bonds or UK equities. | 1 |
While some of you might indeed prefer a robo-regulator delivering this speech, this is not something that Regtech is intended or able to deliver at this point, unfortunately. Frankly, I hope that you would still prefer listening to my sharing, rather than from a tall and handsome roboregulator, even if such a robot were a reality today. Joking aside, Regtech does offer a tremendous potential to complete the Smart Banking ecosystem. 11.Before I discuss our plan for Regtech, I would like to reiterate what Regtech means. As I have mentioned, from the perspective of banks, there are two interfaces that they have to address: one between banks and customers, and the other between banks and the HKMA. The general priority of banks under the Smart Banking initiatives so far has been to concentrate on the interface between banks and customers to offer better digital financial services to users. However, some meaningful progress has been made to streamline the interface between banks and their regulators, such as the work under the Banking Made Easy initiative and the Balanced and Responsive Supervision Programme that I explained at this Conference last year. We do see a need to further facilitate banks’ use of technologies for compliance with regulatory requirements of the HKMA and other regulators and for risk management purposes. Regtech, which essentially means the use of innovative technologies by banks to achieve regulatory compliance or better risk management in a more effective and automated manner, is well positioned to further enhance the interface between banks and regulators. | Conceivably, too, such a failure could have such serious consequences for the liquidity of - or price level in some particular sector of the financial markets, that concerns would arise for the liquidity, or solvency, of other bank or non-bank institutions that were known, or believed, to be heavily exposed to that market. In this sense size does matter - and, whether or not one chooses to describe the risk of this happening as systemic, there is no doubt that a sufficiently large disturbance originating in the non-banking activity of one financial institution could put others in difficulty. This possibility must be of concern to financial regulators, including central banks, concerned with the stability of the financial system as a whole. It certainly in my view provides macro-prudential justification for regulatory oversight of the activity of (large) non-bank financial institutions, and of the non-banking activities of banks - quite apart from micro-prudential regulation in the interests of consumer protection. It provides justification, too, for some form of consolidated prudential oversight of multifunctional financial groups and for monitoring large exposures, both intra-group and to outside counterparties. Where a problem of this sort does arise, it may well justify technical central bank intervention to help contain it - for example by facilitating payments and settlements to minimise market disturbance. | 0 |
I am pleased to announce today three initiatives aimed at further improving efficiency and liquidity in the Singapore dollar corporate debt market. 40. First, MAS will provide swap liquidity to primary dealer banks handling Singapore dollar debt issuance for foreign corporates. These offshore entities usually have no need for the Singapore dollar funds raised and mostly swap them into a foreign currency, usually US dollars. Although the pricing mechanism in the foreign exchange and cross currency swap market is efficient, swap markets have a tendency towards one-way flow because of Singapore’s excess savings over investments. This can lead to uncertainty in the pricing process of the bond issuance. We will therefore support swap transactions at marketdetermined prices, which will ultimately enable swap market liquidity to build in the longer tenors. 41. Second, MAS will partner the industry to create a Singapore dollar corporate debt securities lending platform, from which key players will be able to borrow securities for market making. By providing greater assurance that banks will be able to deliver any given security, this platform will reduce the risk of market makers being squeezed in the event they are unable to short-cover the bonds they have sold. Improved market liquidity will mean that asset managers can be more certain of their ability to enter and exit their positions with minimal price slippage. 42. Third, MAS has initiated a price discovery platform where market participants will contribute end-of-day prices for a universe of Singapore dollar corporate bonds. | Zeti Akhtar Aziz: Developing effective leaders in Asia Speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Launch of the Iclif’s Asian Leadership Index, Kuala Lumpur, 1 April 2014. * * * It is my pleasure to welcome you here this morning for the launch of Iclif’s Asian Leadership Index. The Asian Leadership Index, is part of an important stream of global research on the expectations on leaders in today’s world. The world is rapidly changing, and is becoming more challenging. Effective leaders must act in full recognition of the fact that their best followers will demand more of them. This is because in many cases their expectations of leaders have shifted in an age where information flows have intensified and where travel has removed all our known boundaries. The Asian Leadership Index is a substantive, broad-based research on Asia. The focus on Asia is because the region is becoming increasingly more significant in the global landscape. And yet, there exists little, if any, systematic study of leaders doing business in Asia. | 0 |
Financial independence is so important that it is explicitly listed in Article 282(3) of the Treaty, which provides that the ECB is independent with regard to the management of its finances, meaning budgetary autonomy and ensuring that the ECB has sufficient capital, staff and income to perform independently the tasks conferred on it by the Treaty and the Statute of the ESCB. [14] http://www.ecb.europa.eu/press/key/date/2017/html/sp170330.en.html[03.04.2017 15:53:14] Central bank independence revisited In addition, Article 14.4 of the Statute of the ESCB provides the Governing Council with a veto power to object to national functions/actions of NCBs that interfere with the objectives and tasks of the ESCB, thus further safeguarding, among other things, central bank financial independence. The NCBs cannot assume tasks that would endanger their ability, from a financial perspective, to carry out ESCB-related tasks. Regarding the nature and the scope of the independence granted to the ECB, it is worth emphasising the CJEU’s understanding that the broad concept of independence that the ECB enjoys, and which Article 130 of the Treaty is intended to protect its monetary function. Some scholars and one national court[15] have been even stricter in their interpretation, arguing that the independence of central banks is an exception to the principle of democratic legitimacy. | This downward shift in inflation expectations has a secondround effect on real interest rates, the economy, and inflation. When policy is constrained by the effective lower bound, the downward shift in inflation expectations raises the real interest rate, further diminishing the degree of monetary stimulus, making the downturn worse and reducing inflation even more. Even in times when policy is not constrained, the expectation of belowtarget inflation in the future affects current decisions, putting additional downward pressure on inflation. In other words, monetary policy is always swimming upstream, fighting a current of toolow inflation expectations that interferes with achieving the target inflation rate. A number of alternative monetary policy frameworks have been proposed that aim to tackle the problems associated with the lower bound on interest rates. Although they differ in many ways, it is useful to divide these proposals into three broad categories. The first option is to maintain the basic framework of inflation targeting and to rely on a combination of aggressive conventional and unconventional policy actions when facing economic downturns to limit the deleterious effects of the lower bound. This carries with it the risk that inflation expectations become anchored at too low a level. The second option is “average-inflation targeting,” whereby the central bank purposefully aims to achieve an above-target inflation rate in “good” times when the lower bound is not a constraint. | 0 |
Muhammad bin Ibrahim: Major milestone for financial integration in ASEAN Remarks by Mr Muhammad bin Ibrahim, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Luncheon, hosted by Bank Mandiri, Kuala Lumpur, 6 July 2017. * * * I am pleased to be here today to deliver the remarks for the lunch gathering hosted by Bank Mandiri. I am confident that Bank Mandiri will be the first Qualified ASEAN Bank in Malaysia, a major milestone for financial integration in ASEAN. Indonesia and Malaysia – neighbours and friends Let me start with the close relationship between both of our countries. Our relationship extends beyond our geographical proximity but is bound by our similarities in language, culture and of course – food. These natural forces have allowed us to forge and strengthen a strong history of cross-border trade and investments. Businesses from both countries have also strongly committed to invest and contribute to each other’s socio-economic development. Malaysian companies have made significant investments in Indonesia, amounting to USD12.1 billion at end 1Q-2017. These investments span the financial services, telecommunication and agriculture sectors. In fact, the collaboration between Malaysian and Indonesian corporates gave birth to Malindo Airways Sdn Bhd in 2012. It speaks volume of the partnership and close cooperation between our two countries. Indeed this venture will further open up ASEAN skies and expanded the close ties between the people of Indonesia and Malaysia. Over the last few years, Indonesian firms have also started to increase their presence in Malaysia. | Such collaboration can also be extended to facilitate retail payment card transactions via the domestic debit card schemes of both countries. Eventually, I envision ATMs in Malaysia and Indonesia will be linked seamlessly. This will reduce cost, enhance safety and expand outreach. Conclusion Let me conclude with a quote by Malaysia’s second Prime Minister, Tun Abdul Razak Hussein, who said in 1967 that, “We cannot survive for long as independent but isolated peoples unless we also think and act together and unless we prove by deeds that we belong to a family of SouthEast Asian nations bound together by ties of friendship and goodwill” We have indeed come a long way in our cooperation and journey between Indonesia and Malaysia. The potential of Bank Mandiri as a Qualified ASEAN Bank in Malaysia will be a significant milestone for both our countries and the ASEAN region. It represents the realisation of a vision that was formed more than six years ago with the ASEAN Banking Integration Framework, with roots that go even further back. We should expect greater achievements by both our countries. 2/3 BIS central bankers' speeches Thank you. 3/3 BIS central bankers' speeches | 1 |
ASEAN regulators have taken on a number of initiatives to reduce costs of businesses through the support of greater connectivity, mutual recognition agreements and greater cohesiveness of rules and regulations. Additionally, usage of local currencies as a means of payment and settlement will facilitate our intra-region trade and investment. Common infrastructures for cross border payment and settlement such as through the Asian Payment Network are important to increasing efficiency of doing businesses and reducing costs of remittances and transfers. If we all work together in our various capacities we can together strengthen our region and improve ASEAN people’s standards of living. Ladies and Gentlemen, To sum up, I strongly believe that bankers play a critical role in the future of ASEAN economies and people’s lives. ASEAN banks, given their large scale and power of intellectual and capital resources, must be the force that drives our region forward and improve people’s quality of lives. During this period of VUCA world and changes in economic environment with technology disrupting business landscapes, we must focus on longer term goals. Working together, ASEAN banks must commit to strengthening our regional growth and to ensuring 5 sustainable development. Instilling proper behaviours and cultures into the organization and practicing sustainable banking will strengthen us from within. Looking at today’s agenda, I am delighted that ASEAN bankers will engage and work together to find ways to meaningfully impact our region on issues ranging from digital and fintech to sustainable finance. | Finally, allow me to express once again my gratitude to the co-organizers of this event for making the conference possible, and to wish all the participants a very fruitful meeting and a pleasant stay in Madrid. And without further due, let me now introduce our first speaker, Governor Philip Lane. It is a special honor for us to have him here today. He is especially suited to be our first Keynote Speaker in this event because he has a profound knowledge of economy and finance, as a result of his long and prestigious career as an academic, as well as a brilliant policy-maker. His keynote speech today will verse about “Trends and Cycles in Financial Intermediation”. Philip, you have the floor... 10 For more information on the impact of FinTech on the finance industry see Philippon, T., “The FinTech opportunity”, NBER Working Paper, No 22476, 2016; and Huang, Y., Shen, Y. Wang, J. and Guo, F. , “Can the internet revolutionise finance in China?”, in Song, L., Garnaut, R., Fang, C. and Johnston, L. (eds. ), China’s new sources of economic growth: reform, resources, and climate change, Australian National University Press, 2016, pp. 115-138. 6/6 | 0 |
Also, the OTC derivatives business in foreign exchange, interest rate swaps and credit default swaps had exploded from its start in the early 1980s. The total notional value of the OTC derivatives outstanding for the five largest banks and securities firms currently totals about $ trillion. During this period, there was inadequate attention to the risks that were building up in the system. The regulatory and supervisory framework did not keep up with the changes in size, complexity, interconnectedness and globalization that created growing systemic risk externalities and widened the wedge between private and social costs in the event of failure. Let me mention just a few of the issues: • Capital regulation was lax both in terms of the amount of capital required and the quality of that capital. As a result, many banks did not have the capacity to absorb large shocks and retain access to wholesale funding. • The oversight of the largest securities firms was particularly deficient in terms of ensuring that these firms had sufficient private resources to deal with shocks. The industry was also particularly exposed because in the United States, there was (and remains) no lender of last resort backstop for the securities industry except in extremis.3 • Although global integration brought with it a number of benefits, regulatory coordination did not keep pace with the globalization of financial firms and markets. This allowed the potential magnitude of the negative externalities associated with the failure of globally active firms to expand considerably. | Mr Tarullo added that “I would not apply the presumption in the case of certain de minimis acquisitions or in cases where asset dispositions were judged to offset any increase in systemic risk from the proposed new acquisiton”. 6 Earlier this year, the Board of Governors issued an order approving Capital One Financial Corporation’s acquisition of a federal savings bank, ING Bank. In that order, the Board set forth two principles that are relevant to this particular issue. First, the Board stated that it would generally find a significant adverse effect if the failure of the firm resulting from a merger or acquisition “would likely impair financial intermediation or financial market functioning so as to inflict material damage on the broader economy”. Second, the Board observed that there are some small acquisitions or mergers that would not raise a financial stability concern, such as “a proposal that involves an acquisition of less than $ billion in assets, [or] results in a firm with less than $ billion in total assets……” 6 BIS central bankers’ speeches banks submitted their “living wills” to the Federal Reserve and the FDIC this summer. We have reviewed the first iterations of their plans and are currently drafting feedback for the firms to incorporate in their next submissions. Through such “living wills”, regulators are gaining a better understanding of the impediments to an orderly bankruptcy. This is the necessary first phase in the process of determining how to ameliorate these impediments over time and then doing so. | 1 |
With respect to bank capitalisation, the situation remained largely unchanged in 2014. First, the domestically focused commercial banks’ leverage ratios remained stable at high levels by historical standards. Second, these banks’ risk-weighted capital ratios increased slightly and are significantly above regulatory minimum requirements overall. Furthermore, stress test results suggest that most domestically focused banks should be able to absorb estimated losses without seeing their capitalisation fall below the regulatory minimum. Nevertheless, under the most relevant adverse scenarios for these banks, the losses would deplete a large proportion of their surplus capital. Experience in Switzerland in the 1990s, as in other countries, suggests that this would lead to a general weakening of the banking sector and significantly affect banks’ ability to lend, with negative and lasting repercussions for the real economy. The stress test results highlight the importance of banks holding significant capital surpluses relative to the regulatory minimum requirements. The activation of the countercyclical capital buffer in 2013 and its increase in 2014 has made a significant contribution in this respect. 2 BIS central bankers’ speeches Risk of renewed increase in imbalances on mortgage and real estate markets Overall, imbalances on the mortgage and residential real estate markets have remained broadly unchanged since the last Financial Stability Report. From a financial stability perspective, this is a positive development. However, it is still too early to give the all-clear. On the one hand, imbalances remain at a high level and have not yet started to decline. | These can only be partially explained by differences in the level of risk taken by the banks. Cf., for example, Basel Committee on Banking Supervision, Regulatory consistency assessment programme (RCAP) – Analysis of risk-weighted assets for market risks, January 2013; cf. also EBA, Interim results of the EBA review of the consistency of risk-weighted assets, 26 February 2013; Barclays, The dog that dug, 21 September 2012. Studies at national level have also shown that model-based RWA are too low in some cases. Cf. FINMA Annual Media Conference, “Models and their limitations”, 31 March 2015. BIS central bankers’ speeches 1 To address this problem, regulatory initiatives have been launched at international and national level. At international level, the Basel Committee on Banking Supervision is fundamentally revising the standardised approach. The Committee is also examining the introduction of a floor for internally modelled RWA based on this revised standardised approach. One important objective of the floor would be to ensure that capital requirements based on banks’ internal models do not fall below a prudent level. At national level, FINMA – together with the big banks and with the support of the SNB – has conducted a comparison between RWA calculated using the model-based and standardised approaches. The results of this comparison, in addition to the measures already taken by FINMA and those expected at the international level, will be taken into account by a working group led by the Federal Department of Finance. | 1 |
Recently, as prices have risen so much, it has become increasingly common for households to use the lower loan-to-value ratio to take out new loans on their housing. The new loan can then be used for further consumption, which stimulates activity in the economy. Correspondingly, falling property prices can contribute to subduing demand in the economy. If property prices were to fall heavily during an economic downturn, this could also lead to large loan losses for the banks and further aggravate the slowdown. The property market can be divided into two markets; a market for commercial property and a market for single-family dwellings and tenant-owned apartments. Today I intend to discuss both markets, but I shall begin with the commercial property market. After that I will talk about why housing prices have risen so much in recent years. Finally, I will talk about my views on future price developments. Commercial property The commercial property market has a direct bearing on financial stability. This is because property companies are the banks' largest individual borrowers. Around 20 per cent of the four major Swedish bank’s lending to the general public is to companies managing commercial properties, for instance, office premises or retail premises. The value of these properties is often pledged as collateral for the loans. When commercial property prices fell at the beginning of the 1990s, several property companies experienced problems paying their loan costs, which caused major losses for the banks. | I wish more people had dared to work on disruptions of energy supply (or global value chains) a few years ago. Likewise, the latest report of the Working Group III of the IPCC (dedicated to climate mitigation) contains a chapter (#5) that places great emphasis on the need for sufficiency and behavioral changes, and it discusses the literature exploring how we could thrive as societies and individuals without depending so much on GDP growth. Professor Dasgupta also invites us not only to acknowledge that GDP growth will be limited at some point even if you are a techno-optimist, but also to think about new approaches to economic value and social well-being that do not rely on GDP. All this begs us, and especially the young scholars present today, to ask what will be essential in 5 to 10 years from now. In addition to this need to promote new approaches, it is urgent to act. 9 Page 10 sur 12 We cannot afford to lose time or to wait until we have elaborated “perfect” tools. We need to seek how transformative changes can be implemented as soon as possible and if needed, develop and revise our scenarios, metrics, approaches. The responsibility to revert nature loss falls first and foremost with governments, and no central bank – above all in a democracy - can replace them. | 0 |
In Figure 6, we can also see that the sum of squares for the output-gap forecast is much smaller than for the inflation-gap forecast. A higher repo rate path should have been able to push down both the inflation forecast and the forecast for resource utilisation. This would have reduced the sum of squares for the inflation-gap forecast but not increased the sum of squares for the output-gap forecast by very much. This would move the point for February 2008 in Figure 6 to the left and somewhat upwards. Unless the iso-loss line for the forecast loss function is very flat, that is unless the weight given to the stabilisation of resource utilisation is very high, this should give rise to a lower loss and thus to a more well-balanced monetary policy. The main scenario in February 2008 would thus be an example of a monetary policy that was not well balanced. However, in February 2008 the Riksbank 8 This can be done using the methods developed in Adolfson, Malin, Stefan Laséen, Jesper Lindé and Lars E.O. Svensson (2008), "Optimal Monetary Policy in an Operational Medium-Sized DSGE Model", www.larseosvensson.net. BIS Review 29/2009 9 attached more importance to the CPIX forecast than to the CPI forecast. The CPIX forecast gives rise to much smaller deviations from the target than the CPI forecast; see Figure 7. With regard to the CPIX forecast, monetary policy in February 2008 was better balanced. | The ideal, but normally unattainable, situation would be an iso-loss line at the origin, which represents a loss of zero and means that the forecast for inflation is exactly on target and that the forecast for resource utilisation is exactly equal to the normal level. However, the modified Taylor curve shows the minimum sums of squares that are possible on each decision-making occasion. The best monetary policy therefore entails selecting a point on the Taylor curve so that the iso-loss line for the loss function is as close to origin as possible. This is the point at which the iso-loss line is a tangent to the Taylor curve. Figure 3 shows an iso-loss line that is a tangent to the Taylor curve at point B. For the given lambda, which determines the slope of the iso-loss lines, this point thus represents a well-balanced monetary policy. As I have emphasised, the position of the Taylor curve depends on the initial state of the economy at the time the decision is made. In a situation in which it is more difficult to stabilise resource utilisation, the Taylor curve will be closer to the vertical axis than to the horizontal axis, for example like the dashed curve above point A. | 1 |
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